Health premiums: Where does the money go?
November 7, 2008 by Bill MeltzerPosted in: In this week's e-newsletter, Latest News & Views
Ever wonder what insurance companies actually do with all the money your organization and employees pay in premiums?
A recent study sheds light on the subject – and reveals areas where money gets wasted.
A significant piece (about 10%) of your healthcare premiums get spent on “defensive medicine” treatments. These are treatments and tests that doctors order to reduce the risk of malpractice lawsuits – not because they are medically necessary. The study found hospital outpatient departments and pediatric offices were among the biggest culprits for practicing defensive medicine.
For example, a doctor may order a chest X-ray and urinalysis before minor surgery on a healthy adult.
Such tests drive up the cost of health claims, yet almost never have any medical benefit. In fact, they can even put people at risk. Best practices to reduce the cost effects on your company:
- choose plan designs that place strong emphasis on evidence-based medicine, and
- double up your company’s current educational efforts to teach employees how to ask their doctors questions about their own healthcare.
Mixed news on utilization
It’s not surprising the study finds increased utilization of medical services is one of the main reasons for continued premium increases.
What is surprising is how much of your premium money goes to “good” and “bad” utilization. Good utilization – things like routine physicals, yearly mammograms or colonoscopies – is on the upswing. Bad utilization (such as employees using emergency rooms for routine care) has dropped somewhat for many corporate plans, but still remains high.
The growth of good utilization is keeping pace with big-ticket, bad outcome treatments for late-stage chronic health problems tied to things like obesity and smoking. That shows some employees are getting the message about the need for health-risk screenings. Even so, lifestyle issues alone contribute 3 cents per every dollar of increased premiums.
November 14th, 2008 at 11:26 am
I had hoped that the article was going to shed light on where all the premium money goes, rather than focus on the 10% used for “defensive medicine.” Instead of shedding light on that subject, the article seems to promote insurance companies who promote “good utilization” practices.
I would suspect that a large percentage is spent on “administration” and another on “advertising and lobbying.” It seems to me that the insurance companies do not want healthcare to cost less, because they get a percentage of the cost. They are like the banking industry and the stock market, where they provide a “service” and nothing is really produced.
You make mention of the “defensive medicine practice” but make no mention of what percentage is used to pay malpractice claims. Politically that has been drummed into the public that the high cost of medicine is due to these lawsuits. However, all the figures I can find, show that the amount paid out in malpractice is a drop in the bucket compared to all the other costs.
I live in a city with four major hospitals. Current business models seem to inidcate that for cost effectiveness, they should merge and eliminate redundant services. I know a few conservatives that believe that would be great, just don’t let the government do it, because that would be “socialism.”
What is the total dollar amount spent on healthcare by insurance companies each year? What is the total dollar amount collected from premiums? How is THAT difference being spent?
I fear that the reality is, every change a business makes based on these articles may result in a short term savings, but the real monster is the system and it is determined to grow and consume more of our hard earned dollars. Only instead of dollars it appears as a 0.012% increase. (But on 100 billion dollars a 0.012% increase is significant.)
November 14th, 2008 at 12:35 pm
It has been over 4 years since I saw a breakdown of the distribution of health care premiums. At that time the administrative cost for traditional medical care was said to be 25%. At the same time the administrative cost for medicare was 3.5%. I doubt the numbers have changed much, but I would welcome new data.
All in all the above numbers track with the rest of the developed world, where “socialized” or “universal” health care is substantially less expensive than it is here. The entire rest of the world cannot be totally wrong.