by Jordan Schneider
In August, small businesses in California will receive around $36 million in rebates from health insurance companies such as Blue Shield of California and Anthem Blue Cross, according a Tuesday article in the Los Angeles Times. These rebates are the result of new federal policies to bring down runaway health care costs.
Each year, Californians spend billions of dollars on unnecessary medical treatments and services, administrative waste, and overpriced medications—all of which drive up costs without actually improving patient care. In our 2008 report, Diagnosing the High Cost of Health Care, we examined all three of these categories of unproductive spending, and we highlighted how bringing down administrative costs, in particular, could save California billions of dollars each year.
Under the Affordable Care Act, insurers now have limits on their administrative spending. The law mandates that insurers must spend at least 80 percent of premium payments they receive on direct patient care; for larger employers, insurers must spend 85 percent on care. Before the new law passed in 2009, our research showed that a significant share of health insurers failed to meet this threshold of spending on patient care. For example, in 2007 the absence of an 85 percent standard allowed California health insurance companies spent $1.1 billion on administration and profits instead of health care.
Today, if companies collect more in premiums than they spend on patient care and administrative costs, then they have to return the money to their policyholders. The large rebates we’re beginning to see in California after requiring all insurers to meet a higher standard indicate that many insurers have been charging Californians too much for their health coverage up-front.