Reducing Health Insurance Administrative Costs Could Help Pay for Health Reform

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As lawmakers debate how to pay for an overhaul of the nation's health care system, a <a href="/publications/issue-briefs/2009/jul/how-health-care-reform-can-lower-costs-insurance-administration">new report</a> from The Commonwealth Fund projects that including both private and public health coverage choices in a new insurance exchange would save the United States as much as $265 billion in administrative costs from 2010 to 2020. <br /><br />"Health reform can help pay for itself, but both private and public insurance choices are critically important," said Commonwealth Fund President Karen Davis, who coauthored the new study. "A public insurance plan can help drive new efficiencies in the system that will produce large cost reductions. Without a public plan, much of those potential savings will be lost."<br /><br />The report, <a href="/publications/issue-briefs/2009/jul/how-health-care-reform-can-lower-costs-insurance-administration">How Health Care Reform Can Lower the Costs of Insurance Administration</a>, says that it is possible to achieve near-universal coverage, improve health care quality and efficiency, and lower the trajectory of health care costs through a comprehensive private–public approach to health reform. Insurance administrative savings from such an approach would be realized through less marketing and underwriting, reduced costs of claims administration, less time spent negotiating provider payment rates, and fewer or standardized commissions to insurance brokers. The U.S. leads all other industrialized countries in the share of national health care expenditures devoted to insurance administration. About 12.4 percent—or $96 billion—of the $775 billion in privately insured health care spending went for administrative costs in 2007. <br /><br />The absence of underwriting and profits has kept the administrative costs of public insurance programs relatively low. However, between 2005 and 2006, Medicare's annual administrative costs jumped from $12 billion to $20 billion, largely because of increased payments to cover the administrative costs of private health and drug plans participating in the program. By contrast, administrative costs in traditional fee-for-service Medicare actually declined slightly over the same period.