California Health Insurance Companies Spend $10.3 Billion On Administration And Profit

Main Category: Health Insurance / Medical Insurance
Article Date: 25 Jun 2008 - 5:00 PDT

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Private health insurance companies regulated by the Department of Managed Health Care (DMHC) spend $6 billion each year on administration, and divert an additional $4.3 billion to profit, according to a report released by the California Medical Association (CMA). Prepared using data obtained under the Knox Keene Act, the report breaks down how private health insurance companies spend their revenues.

"This report paints in stark terms why health care costs are skyrocketing for Californians," said Dr. Richard Frankenstein, M.D., President of CMA. "Health insurance companies in California spend billions of California's health care dollars each year on administration, and for-profit insurers divert billions of dollars more to profit. Californians' health care dollars should be spent on health care, not on bureaucracy."

Currently, private health insurance companies regulated under Knox Keene - representing some 60% of the health insurance market - are required to spend no more than 15% of their revenues on administrative costs. CMA and other health care advocates believe the statute includes profits as administrative costs; health insurance companies exclude profits from the 15%, allowing them to spend as little as they want on actual health care. SB 1440, a bill authored by Senator Sheila Kuehl and sponsored by CMA, would require insurance companies to spend 85% of their revenues on health care, driving down health care costs for consumers and potentially making coverage more affordable.

"It's not acceptable for us to ignore such massive waste in the insurance industry when Californians are being bankrupted by rising health insurance premiums and gutted benefits," stated Senator Kuehl. "California consumers have a right to know that there is a basic formula in the law for how much of their money is actually being spent on medical care. This is the least we should be doing."

If SB 1440 had been in effect in the last reporting year, HMOs would have spent $1.1 billion less on administrative costs and profit - money that would have gone instead to provide health care to their policyholders. Blue Cross policyholders alone would have benefitted from $700 million more in health care that instead went to administrative costs and profit.

The Department of Insurance (DOI) collects the same data as the DMHC, but the DOI refuses to make the data public. CMA strongly supports the DOI and DMHC releasing this information to the public so that consumers can make informed decisions about whether a health plan is spending their premiums on health care.

At the federal level, CMA is supporting the Children's Health and Medicare Protection Act (H.R. 3162), which passed the House of Representatives last summer but stalled in the Senate. It requires health plans to limit profit and overhead to 15% of government dollars paid to them to provide medical care to Medicare seniors. Compared to the Traditional Medicare program where less than 5% of taxpayer dollars are spent on administration, the Medicare Advantage health plans have diverted billions away from medical care for California's 4 million Medicare beneficiaries.

A full copy of the Knox Keene report is available here (13 MB, so may take a minute or two to download.)

California Medical Association