Commonwealth Fund: Public, private insurance would save $265B over ten years

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As lawmakers debate how to pay for an overhaul of the U.S. healthcare system, a report from the Commonwealth Fund projects that including both private and public insurance choices in a new insurance exchange would save the United States as much as $265 billion in administrative costs from 2010 to 2020.

Congressional leaders are attempting to keep 10-year federal budget costs of healthcare reform legislation under $1 trillion.

"Health reform can help pay for itself, but both private and public insurance choices are critically important," said report co-author Commonwealth Fund President Karen Davis. "A public insurance plan can help drive new efficiencies in the system that will produce large cost reductions. Without a public plan, much of those potential savings will be lost."

The Commonwealth Fund Commission on a High Performance Health System has issued a set of policy options to achieve near-universal health insurance coverage, while reforming the U.S. healthcare system to achieve nearly $3 trillion in savings by 2020.

Central to the proposal is the creation of a U.S. insurance exchange that would largely replace the individual and small-group insurance markets, offering families and business a choice of private or public plans with a benchmark standardized-benefit package, the commission said.

A Commonwealth Fund analysis of three paths to reform found that an approach that includes a public plan in the exchange that would pay providers at Medicare rates would save about $265 billion in administrative costs over 2010-2020. On the other hand, an insurance exchange that provided only a choice of private plans would increase administrative costs by $32 billion over the same period.

The report proposed that savings from the mixed private-public reform approach would be realized through less marketing and underwriting, reduced costs of claims administration, less time spent negotiating provider payment rates and fewer or standardized commissions to insurance brokers.

"A public plan would create an incentive for competitive private plan premiums with streamlined operations," said Davis. "Savings from these new efficiencies can be used to extend health insurance to people who can't afford it and to improve benefits."

The United States leads all other industrialized countries in the share of healthcare expenditures. The cost of administering the U.S. healthcare system totaled nearly $156 billion in 2007, and that figure is expected to double--reaching $315 billion--by 2018. In addition, costs incurred by physicians in their transactions with health plans are estimated to be as high as $31 billion a year.

About 12.4 percent, or $96 billion, of the $775 billion in privately insured healthcare spending went for administrative costs in 2007. That $96 billion-- representing what insurance companies received in premiums, minus what was paid in medical claims--included claims processing, advertising, sales commissions, underwriting, and other administrative functions; net additions to reserves; rate credits and dividends; premium taxes; and profits.

By contrast about 6.1 percent, or $60 billion, of the $974 billion in public program healthcare spending went for administrative costs in 2007. That includes federal, state, and local governments' administrative costs for public health programs such as Medicare, Medicaid and the State Children's Health Insurance Program.

The absence of underwriting and profits has kept the administrative costs of public insurance programs relatively low. However, between 2005 and 2006, Medicare's annual administrative costs jumped from $12 billion to $20 billion, largely because of increased payments to cover the administrative costs of private health and drug plans participating in the program. By contrast, administrative costs in traditional fee-for-service Medicare actually declined slightly over the same period.

"Healthcare reform represents a significant opportunity to reduce administrative complexity in the current system," said report co-author Sara Collins, a vice president at The Commonwealth Fund. "These findings indicate that such simplification will help lower premiums and reduce the cost of extending affordable coverage to everyone."

The Commonwealth Fund is a private foundation supporting independent research on health policy reform and a high performance health system.