Health insurance companies have to pay more than a billion dollars in rebates this year, because they didn’t spend at least 80 percent of premiums on medical care. According to the Chicago Tribune:
Under the Affordable Care Act, insurance companies are required to spend 80 to 85 percent of the money you pay in premiums on actual health care. … Insurers that don’t spend the prescribed amount have to issue rebates.
Is that an unreasonable amount to spend on actual health care? Well, take a look at what Medicare spends on administrative costs. According to the Medicare Trustees Report, total Medicare expenditures for 2011 were $549.1 billion. Total administrative costs were $7.8 billion. That’s 1.4 percent on administrative costs, and 98.6 percent on payments to hospitals ($167.8 billion), skilled nursing facilities ($32.9 billion), home health care ($19.6 billion), physicians ($67.6 billion), prescription drugs ($66.7 billion), other benefit costs ($62.9 billion) and Part C private health plans ($123.7 billion.)
So the efficient private insurance system has to be forced to spend 80 percent of premiums on medical care, and some companies fail to meet that requirement and have to pay rebates. Meanwhile, the “inefficient” government delivery of service has a 1.4 percent administrative cost.
(Thanks to Kip Sullivan and Ken Bearman for sending along the Medicare information.)