Code Red: Two Economists Examine the U.S. Healthcare System

August 6, 2010

Howard Dean: Who Are You Crapping?

Filed under: Health insurance,Health Reform,Health spending — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 1:43 pm

Democratic honcho Howard Dean wants to do away with the insurance mandate. Why? Because purchases of private insurance enrich evil insurance company executives. Here are his own words:

“The bill was supposed to give Americans choices about what kind of system they wanted to enroll in. Instead, it fines Americans if they do not sign up with an insurance company, which may take up to 30 percent of your premium dollars and spend it on CEO salaries — in the range of $20 million a year — and on return on equity for the company’s shareholders.”

Let’s fact check this a bit. Total private health insurance premiums in the U.S. approach $1 trillion. A lot for sure. Dean wants you to believe that a big chunk of this, as much as 30% or $300 billion, goes for CEO salaries. This would require 15,000 insurance CEOs each making $20 million annually. With all the consolidation that has occurred, I am not sure there are even 150 insurance companies (and perhaps not even 50), let along 15,000. Let’s be generous to Dean and suppose that there are 150 CEOs and other top industry executives making $20 million. This works out to $3 billion.

Dean suggests that whatever doesn’t go to CEOs goes to shareholders. In a good year, health insurers enjoy returns on sales of about 3%. (Returns on assets are strong because assets are relatively small.) With annual revenues of $1 trillion, this translates into aggregate profits of about $30 billion.

If we add together CEO salaries and insurer profits (and ignore the fact that a lot of plans are nonprofit Blues plans that do not have shareholders), we can account for about $33 billion out of Dean’s $300 billion. Thus, Howard Dean has overstated his case by a factor of 9. In the immortal words of Da Coach, Mike Ditka, “Howard Dean, who are you crapping?”

(Liberal bashers take note, in an earlier blog I take to task highly paid insurance executives. But let’s not pretend that we fix anything merely by cutting their pay and trimming profits. $33 billion represents about 1.6 percent of total U.S. health spending.)

5 Comments

  1. […] This post was mentioned on Twitter by Kellogg School and Tanmay Sinha, Cesar A. Guilarte M.. Cesar A. Guilarte M. said: Por eso las primas son tan caras RT @KelloggSchool: Insurance companies spend 30% of premiums on CEO salaries http://ow.ly/2mcNM […]

    Pingback by Tweets that mention Howard Dean: Who Are You Crapping? « Code Red -- Topsy.com — August 6, 2010 @ 4:46 pm

    • Hermann is spot on with his concerns about insurer market power (though the airline analogy only goes so far — airfares have plummeted in real terms since deregulation.) Even so, insurers could double their margins (perhaps they have already) and that would be little more than a blip on the radar screen of health care inflation. Insurers make great whipping boys for politicians – the most important thing they “make” is risk protection and as important as that is, no one actually sees it.

      It is just so damn frustrating that the public debate about 17 percent of the health economy is caught up in overblown rhetoric about rationing and CEO compensation. I suppose we have the health system that we deserve.

      Comment by dranove — August 8, 2010 @ 2:42 pm

  2. I agree that executive compensation is a poor argument to make in support of a repeal of the health insurance mandate. Unfortunately, CEO pay is a hot topic that most Americans understand. If I were Howard Dean, I would continue to request a repeal but I would do so on the principal of competition and consumer protection.

    The mandate forces individuals and small business employers to buy insurance from a consolidating pool of insurers. Given the pace of merger activity, each merger shifts power from the buyers of insurance to the providers of insurance, namely the insurance companies. By taking away the opt out alternative for health insurance, the mandate takes away a fundamental consumer tool to combat against premium hikes from a powerful cartel.

    This has happened in other industries. Many believed that competition would reduce pricing in the airline industry. But American Airlines CEO Bob Crandall’s 1983 phone call to the CEO of Braniff Airlines revealed the true inner workings of so-called competitors. He said, “I think it’s dumb as hell to sit here and pound the s$#t out of each other and neither one of us making a fu$#@#g dime… Raise your goddamn fares twenty percent. I’ll raise mine the next morning.”

    It would be naive to believe that backdoor deals would not occur in the health care industry. It probably wouldn’t be carried out so brazenly by health insurance CEOs but it would happen, more likely by consultants and lobbyists. The end result would be the same. The small business owners and self employed individuals, forced to buy health insurance from a cartel, gets undermined by a political structure who doesn’t, will not or cannot protect his/her interests.

    For a universal health insurance program to work, power needs to shift towards consumers. Other alternatives to repealing the mandate would be to offer a “public option” that competes against the health insurance cartels or to reduce the barriers for foreign companies to offer insurance in the US. In any case, the system needs to become more competitive. Again, if I were Howard Dean, these are the points worth arguing.

    Comment by Hermann Mazard — August 8, 2010 @ 2:11 pm

  3. I agree with Hermann that for health care reform to work power needs to shift toward consumers. The only way to do that would be to make consumers more responsible for the true cost of health care. And the only way to do that is to eliminate co-pays and cover only catastrophic cases at 100%. Maybe that means high deductible plans with only 50% co-insurance. Something has to be done to drive down utilization. Another thing that would help is having health care providers actually list their prices up-front before patients are treated. If I walk into the doctor’s office or the hospital and am able to look up at the “menu”, I may decide not to get that EKG today. Or, I may decide not to order anything at all and go to a less expensive provider. It’s always interesting to hear well-paid, employed individuals denounce the ‘entitlement’ attitude in this country when those same individuals would pitch a fit if you took away their $20 doctor office co-pay and made them pay 50% of the actual cost of the visit.

    Comment by Brian H — August 12, 2010 @ 1:03 pm

    • As much as I would like to see more accountability, there are serious limits on what we can expect. Simply put, you can expose patients to the financial consequences of their decisions or you can protect them against financial risk of illness, but you can’t do both, not without doing so rather imperfectly.

      50% coinsurance is just not realistic. A typical hospital stay involves medical bills exceedng $10,000. Most Americans do not have savings of $5000. Likewise, any realistic deductible (say, below $5000) will encourage healthy folks to pay attention to prices but will be useless for anyone who is hospitalized — the deductible will be exhausted on the first day.

      Protection against financial uncertainty is a good, just as healthcare is a good. Severely restricting the market for the former in order to “enhance” performance of the market for the latter is not a free market solution.

      Eliminating the tax subsidy that favors generous insurance plans over less generous plans (including high deductible plans and HMOs) does allow fair market competition and allows consumers to decide how they would optimally balance financial protection and efficient care delivery.

      Comment by dranove — August 12, 2010 @ 1:31 pm


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