A Billion Here, A Billion There: California HMO Figures Are a Challenge for Free-Market Health Advocates

June 24, 2008

If the Free Market can cure all the ills in our health economy, why are we seeing billion-dollar expenditures for non-health items – even as prices soar and buyers rage? It looks like somebody has taken the Invisible Hand off the wheel.

The California Medical Association, which has its own ax to grind, is publicizing state data about HMO expenditures.  (Remember HMOs?  They’re the organizations that were going to improve outcomes while cutting costs.)  According to data from the Department of Managed Health Care, California HMOs spent about $6 billion last year in administrative expenses – including seven-figure salaries for a number of CEOs.

Meanwhile large plans like CalPERS are facing 8% increases, while individual enrollees – the linchpin of consumer-oriented free market policies – are seeing increases in the 10% range.

If the market is really “rational,” as we’re always being told, why aren’t buyers forcing these overhead costs down?

Sen. Sheila Kuehl is quoted as saying that her bill, which mandates that plans spend no less than 85% of premiums on direct health costs, would have resulted in $1.1 billion more being spent on medical care.  I need to read Sen. Kuehl’s bill in detail, but here’s my problem with the principle:  The easiest was to get to that ratio is by increasing premiums, not reducing administrative expenses. Unless the bill prevents that, that’s the likeliest outcome – especially since market forces don’t appear to be doing the trick.

In the abstract sense, I don’t care how much profit HMOs make, if they’re getting the right results.  If they can provide better health care at a lower premium cost, and make a 20% or 30% profit margin – great!  Everybody wins.  The problem is that there’s no indication that they can.

For balance, total California health spending is in the hundreds of billions, so we’re talking about marginal figures.  But marginal or not, you save a billion here and a billion there and pretty soon you’re talking real money.

And a number of the state’s HMOs fall within Sen. Kuehl’s margins, including CIGNA at 94.3 percent, Inland Empire at93.1 percent, and Kaiser at 90.6 percent.  Community-based LA Care clocks in at an impressive 97.1 percent.

But the question remains:  If the market can’t get these escalating costs under control – even with administrative expenses in the $6 billion range – how can it be the stand-alone solution of the future?

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