This paper examines trends in health insurance administrative costs and profits during the decade ending in 2009, arguing that these costs represented a shrinking proportion of total healthcare premiums over that period. The paper contends that efficiency gains allowed insurers to absorb expanding healthcare demand without proportional cost increases. It also considers the likely impact of the Affordable Care Act on administrative expenses during its transitional period, and critically evaluates graphical data showing premium growth aligned with benefit growth — while acknowledging the limitations of that evidence and the counterargument that insurer profitability motives may have driven premium increases independent of actual cost pressures.
During the ten-year period ending in 2009, the administrative costs and profits of health insurance companies in the United States rose more slowly than other healthcare costs and came to represent an ever-shrinking proportion of healthcare premiums. Much of the increase in administrative costs can be ascribed to inflation, especially during the years prior to the recent recession, and ongoing expansions of healthcare coverage and legislation during the period also required some increases.
The cost of care and the amount of care provided increased substantially during this period, however, and it is the increased demand that this placed on health insurance administrative efforts that accounts for the growth in these costs. In other words, health insurance actually became more efficient and less costly to administer during this period, remaining able to provide necessary administrative services for rapidly expanding healthcare needs with only a modest expansion of overhead. Health insurance companies were doing more with less, and this is why the percentage of each healthcare dollar spent that goes toward health insurance administrative costs and profits diminished year after year throughout this period.
Should data show an increase in the percentage of healthcare dollars going toward administrative costs and possibly profits in the years following 2009 — a reversal of the prior downward trend — much if not all of that change could almost certainly be ascribed to the major overhaul of healthcare legislation that took place in 2010 with the signing of the Affordable Care Act. Though not all of the changes written into the Act had gone into effect immediately, those that had already created new mandates, along with preparations for those still to come, would necessarily increase the administrative costs of providing health insurance, especially in the short term during the years of transition to the new system.
Requirements regarding how long children can remain on their parents' policies, new mandates regarding pre-existing conditions, and a host of other changes — changes that might be viewed favorably by consumers and that might ultimately create a more comprehensive system — nonetheless require extra administrative effort. As a result, a higher proportion of healthcare dollars would be directed toward insurance administration during this transitional period. Any additional profits seen during this time would be the result of over-estimation of cost increases and would likely diminish once the transitional period concluded.
"Premium increases matched benefit growth dollar-for-dollar"
"Graphic alone cannot prove causation or rule out profit motives"
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