“The insurance companies last year alone sucked $23 billion in profits out of the health care system.” - Elizabeth Warren, June 26, 2019

“Profits are an essential part of capitalism—they reward savers, incentivise innovators and create surplus funds for investment.” The Economist, July 18, 2019

Self-described capitalist Elizabeth Warren appears to be of the “profit is theft” camp - odd considering her take on profit is not all that different from Marx’s idea of profit as the surplus value of labor that is appropriated by capitalists when products are sold. The Economist’s view is more that profit creates its own surplus value beyond what accrues to the capitalist, conferring a myriad of benefits to wider society. Call it the unintended consequences of selfish behavior.

Of course, the spill-over effects of capitalist greed are not all conducive to the common good. And so the government must step in and tame the wild beast without killing its spirit. Not an easy task but a task made easier by a clear understanding of how capitalism works its magic in specific cases. It’s one thing to say a free market lifts all boats and quite another to appreciate how this happens on the ground (or in the water).

For example, health insurance companies: what do they give back in exchange for their $23 billion in profits? For starters, economists have estimated that private insurance plans “provide better-quality medical care at 10% less cost” than the Medicare system (controlling for patient risk factors). Private insurance companies also lose much less to medical fraud than Medicare and Medicaid, with a fraud rate of perhaps 1 to 1.5 percent compared to around 10 percent for Medicare and Medicaid.

Consider that in 2017, health insurance companies made a collective profit of $16 billion (the $23 billion figure is from 2018). The same year, Medicare lost $52 billion to medical fraud. If Medicare’s fraud prevention were as effective as that of private insurers, they would have lost under $8 billion in 2017. In other words, that year insurance companies gave back in fraud prevention much more than what they took in profits. On top of that, insurance companies gave back even more by promoting care efficiencies - as in reducing over-testing and over-treatment.

Between assertive claims examiners, aggressive utilization management, preauthorization procedures, encouraging the use of primary rather than specialist care, and pushing outpatient over inpatient surgery, insurance companies cut unnecessary healthcare spending. The money saved didn’t just go into their own pockets but went to patients, their families, and employers.

And the profit motive made it happen.

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Links and References:

Accident & Health Insurance  Pre-Tax Profit Margins https://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=702

Behind The Headlines: Private Healthcare Plans Pay Hospitals More Than Twice The Medicare Rate. Exploring the Problem Space, May 27, 2018

Centers for Medicare & Medicaid Services (CMS) National Health Expenditure Accounts https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nationalhealthaccountshistorical.html

GAO-18-88 and GAO-18-88 Reports on Medicare and Medicaid Fraud https://www.gao.gov/assets/690/688748.pdf    https://www.gao.gov/assets/700/693156.pdf 

IOM Report Focuses On $750 Billion In Inefficient Health Care Spending https://khn.org/news/iom-report-focuses-on-750-billion-in-inefficient-health-care-spending/

Issues 2020: Private Health Insurance Saves Americans Money Chris Pope/Manhattan Institute August 1, 2019

How Employer-Sponsored Insurance Drives Up Health Costs by Avik Roy/Forbes Lyu et al. (2017) Overtreatment in the United States https://doi.org/10.1371/journal.pone.0181970

Medicare And Medicaid Fraud Is Costing Taxpayers Billions. Merrill Matthews/Forbes May 31, 2012.

NHE Fact Sheet 2017 https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nhe-fact-sheet.html  

Vilsa Curto et al., “Healthcare Spending and Utilization in Public and Private Medicare,” NBER Working Paper 23090, January 2017