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Scarecrow has a must-read explanation of why health reform without a public option turns into a giant profit machine for health insurance companies and their shareholders. Here's an estimate of just how much money we are talking about: $1.39 trillion of new revenues over the first eight years of the new statute.
The new statute requires everyone to have health insurance. If there is no public option, they have to buy insurance from a private company, either a for-profit company or a non-profit, like some Blue Cross companies.
I estimate that $906bn will go to for-profit insurance companies, and of that, $35.8bn goes to the bottom line, and $31.2bn goes to shareholders. The CBO tells us that subsidies through the exchange will total $773bn over that period. I estimate that $19.9bn of the increased profits at the for-profit insurance companies will come from taxpayer subsidies.
The government isn't the only payer. Businesses and individuals will pay an additional $619.5bn for coverage. Taxpayers will pony up a bunch more for Medicaid and SCHIP. A lot of it is shifted from one payer to another, but a fair amount is new money for our bloated system.
The public option, if properly done will be a lot cheaper, and will siphon off a lot of the money from the for-profits. I did a very rough estimate of that here. I will try to sharpen that up in a future post.
It isn't just that the private companies get massive amounts of new revenue. The investments held by insurance companies, profit and non-profit, will increase dramatically, justifying massive increases in compensation to management and the board of directors (Susan Bayh might get a nice raise). Those fat profits have to go somewhere, so we can expect the for-profit giants to buy up the rest of the non-profit blues, creating more companies too big to fail, sitting there like giant fluffy pigeons for the Wall Street buzzards.
The following chart shows the estimated increase in premiums and profits under the House bill if the public option is stripped out. The amounts are in Billions of Dollars.
| Year | Newly Covered | Increased Premium | Subsidy | For-Profit Premium | Increased Net Income | Subsidy To For-Profits |
|---|---|---|---|---|---|---|
| 2012 | 1.0 | 5.2 | 0 | 3.4 | .1 | 0 |
| 2013 | 21.0 | 116.4 | 33.0 | 75.7 | 3.0 | .8 |
| 2014 | 27.0 | 158.9 | 72.0 | 103.4 | 4.1 | 1.9 |
| 2015 | 31.0 | 193.8 | 105.0 | 126.1 | 5.0 | 2.7 |
| 2016 | 31.0 | 205.8 | 123.0 | 133.9 | 5.3 | 3.2 |
| 2017 | 32.0 | 225.6 | 134.0 | 146.8 | 5.8 | 3.4 |
| 2018 | 31.0 | 232.1 | 146.0 | 151.1 | 6.0 | 3.8 |
| 2019 | 32.0 | 254.5 | 160.0 | 165.6 | 6.5 | 4.1 |
| total | 1,392.5 | 773.0 | 906.1 | 35.8 | 19.9 |
Assumptions and Methodology
Here's the part where I show my work. Not to worry, it's all arithmetic, and thank heaven for spreadsheets.
Years. I start with the report of the Congressional Budget Office on the impact of the House Tri-Committee Bill. It estimates the effect of the bill on the federal budget for the years 2010 to 2019. The bill first shows effects in 2012, so the chart starts there.
Newly Covered. The CBO estimates the number of new people who will be covered each year of the plan, other than the elderly. This column shows the number of people covered by the new exchange plus those newly covered by employers each year.
Increased Premiums. The Kaiser Family Foundation tells us that the average premium in 2008 for single policies was $4,704, and for family policies the average premium was $12,680. The National Coalition on Health Care projects premiums to rise at an annual rate of 6.2%. I apply that to the 2008 premiums to calculate rates for premiums in all subsequent years. In 2019, the individual plans will cost $9,197, and the family plans will be at $ 24,575. Just wow. That doesn't include deductibles and co-pays. These figures compare well with those in a report from the Commonwealth Institute, which uses a lower figures for 2008 premiums.
I assume 8% of the newly covered people are single and the rest are in families. If more people have single coverage, the total premiums will be higher. The Census says that the average family has 3.13 people. From these figures, we can get the number of family and single policies for our newly covered group. The spreadsheet calculates the number of new family policies and new individual policies, multiplies them by the respective premiums that year, and adds them up. Technology is wonderful.
Subsidy. The CBO tells us the subsidy figures each year, a total of $773bn. Those figures make up this column. The Tri-Committee Bill has a formula for determining the amount of subsidy paid to people who can pay some but not all the cost of insurance. The poorest people will be on Medicaid and SCHIP.
For-Profit Premium. CBO says that in 2013, 158 million people will have employer insurance, and 12 million will buy private insurance, a total of 170 million. There are other numbers for insurance policies outstanding, but this number attempts to correct for the people with multiple sources of coverage, so we'll use it.
Private insurers are either for profit or not for profit, like most of the blue cross blue shield companies. The non-profits don't have shareholders, and don't pay out their profits. Instead, the excess funds are added to something called "subscriber reserves". The blues insure about 100 million people. Wellpoint, a group of blues, is for-profit, and insures 35 million people. Let's assume that the other 65 million people are covered by non-profits. That makes 105 million people covered by for-profit plans. This may not be quite accurate because of the overlapping policy problem. Let's assume that the newly covered use blues and the for-profits in the same ratios, 65%, so this column is 65% of the Increased Premium column.
Increased Net Income I started with a list of the ten largest private insurance companies. I used the 2008 10-K to get the total revenues and net income for each company.
Total revenues consist primarily of health insurance premiums, but they also include administrative fees for self- funded plans, and income from related businesses. They also include premiums from Medicare Advantage, Medi-gap insurance and Medicare Part D (the drug part). The revenue figures are not completely comparable; some companies do more of each than others. The 10-Ks vary in the amount of segment detail, and in the way they define their businesses, so it would be difficult to find a consistent measure of premiums for the non-elderly. Instead, I assume that the differences balance out over the top 10.
I summed total revenues for the companies and net incomes, and divided. This gives an average net income figure of 3.21%. I think this is low, because 2008 was a bad year for investments and investment income. I try to balance this out by adding back unrealized investment losses to net income. Accounting rules require insurance companies to show losses on investments, even if the company intends to hold the investments to maturity. If anyone can hold to maturity, it's insurance companies. I generally used the net unrealized loss, but I used gross loss if it seemed more sensible for a specific company. With this change, the percentage goes to 3.955%. The spreadsheet applies that percentage to new premiums.
Subsidy to For-Profits. This column multiplies the income percentage of 3.995% to the subsidy column. It shows how much of the subsidy is going to the bottom line of for-profit insurance companies.
Increased Payout to Shareholders. This number is in the text, not the chart. I start with dividends and share repurchases. Dividends are a direct payment to shareholders. Repurchases are a direct payment to some shareholders, and an indirect payment to the remaining shareholders. Buying back shares of company stock generally raises the market price of the securities. Shareholders can sell their stock at the higher price, and benefit from the lower capital gains rate, while dividends are subject to taxation at the corporate level and to investors.
I add dividends and repurchases and divide by total revenues. The result is the percentage of total revenues that go to shareholders. The average of these figures is 3.44%, which I think is low, partly because 2008 was a bad year for investments and investment income, and partly because Humana, one of the largest companies, pays no dividends and has a very small repurchase program. The effect of repurchases on stock market prices isn't calculable, although it is likely to be positive. I multiply that figure by my revenue figure to get what I think is a very conservative estimate of the amount the Tri-Committee Bill will bring to shareholders, $31.2bn.
Summary. I knew these numbers were big, after all, we are adding 30 million people to the insured rolls. Even so, I am appalled. How could anyone read these figures and conclude that the current plan is a good idea? The public option isn't much, but it should lead to serious cost control. Without it, we're just subsidizing the current wasteful system.
All that money the insurance companies are pouring into lobbying and advertising, and whatever else, is going to cost all of us an enormous amount of money.
___________
Errors are mine, but this wouldn't haven't existed without the help and encouragement of everyone backstage. I nominate Jane, Scarecrow, Peterr, Twolf, and Gregg for the Joe Klein "Bloggers don't have editors" award.
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