More Bang for the Health Care Buck
How an Efficiency Standard for Health Insurers Can Reduce Overhead and Deliver More Patient Care

Executive Summary

The high cost of health care in California imposes an increasing burden on households, businesses, government, and the state’s economy – a burden made heavier by the current economic crisis. The money that insurance companies spend on inefficient administration, billing and marketing – instead of medical care for their enrollees – contributes to the high health care costs Californians must endure. To encourage efficiency and get costs under control, California should require health plans and insurers to spend at least 85 percent of revenue on health care. The majority of California health plans, including small, large, non-profit and for-profit HMOs, already meet this efficiency standard, as do a large percentage of health plans and insurers across the country.

Health care is enormously expensive in California. But a lot of the money Californians spend on health insurance goes toward things that have nothing to do with keeping us healthy, such as inefficient administration and billing practices, marketing, and profits.

•    In 2004, insurance companies, the state and federal government, individuals and other payers spent $167 billion on health care in California, equal to 11 percent of the state’s gross domestic product.
•    For 36 California HMO plans evaluated by the California Medical Association, administrative spending ranged from 4.1 percent of revenue to 16.3 percent.
•    Health plans and insurers have an incentive to keep the percentage of revenue they spend on health care low. For example, Great-West Healthcare of California decreased the percentage of revenue it spent on medical costs every year from 2003 to 2007, from 85.8 percent to 69.4 percent. Over the same period the company’s profits increased from 0.5 percent to over 10 percent, while the portion spent on administration stayed essentially the same.

Health plans and insurance companies have an incentive to reduce the amount they spend on health care because the stock market favors companies that devote higher portions of their revenue to administration, marketing, and profit-taking.

To get rising health care costs under control, it is critical to encourage greater insurer efficiency and increase the value of coverage by requiring insurers to spend 85 cents of every revenue dollar on health care. Providing incentives for efficiency will reward insurers for finding ways to reduce administrative costs and deliver better value to consumers. Further, data on current practices of California insurers shows that an 85 percent standard is both strong and achievable.

Successful health plans and insurers can, and often do, spend more than 85 percent of revenue on health care.

•    While some California health insurers spend too small a share of revenue on health care, many major HMOs achieve a proper balance. More than two-thirds of the major HMOs in California spend at least 85 percent of their revenues on health care.
•    Nationally, many health insurers – including some of the nation’s largest and most respected health plans, such as Aetna’s plans in Washington and Michigan, and Anthem’s plan in New York – spend the bulk of revenue on health care. Nearly half of 53 health plans surveyed nationwide spend at least 85 percent of their revenues on health.