- Dec 29, 2008
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While there would be a small savings from the lack of a profit in a government run program, the true savings would be in the administration of such a plan. Currently, administrative costs eat up over 25% of healthcare costs. The argument is that government administration costs would be drastically less. Of course, this is speculation, but I would be interested in seeing how it pans out. If true, a government plan could run with much lower overhead, which in turn would equate to much lower premiums.
Obviously, if this turns out to be true, private insurance companies would not be able to compete as most would turn to the public option. That seems to be what scares the insurance companies the most.
The examples of low administrative costs for government programs come from programs that run without competition so there are no marketing costs. In addition, a significant amount of an insurance company's revenues comes from investment returns on its reserves. If the public plan invests its reserves in Treasuries, as Medicare and SS do, it will earn less than private competitors and have to make up the difference through higher premiums, and if it invests in the private sector, it will have to add another administrative department, in addition to the marketing department, that other government programs do not have. Marketing and investment professionals that can compete effectively with those in private companies don't come cheap, so there goes the argument about lower administrative costs.
A government program would not be looking to turn a profit to reinvest to earn greater profits.
You misunderstand. Insurance companies base their premiums an average of expected costs over the next many years and accumulate reserves against future costs; part of what you pay in today is for what you will cost the company next year or in ten years, etc. Accordingly, they accumulate large reserves against these future liabilities and this money is invested, and the income from these investments keeps premiums lower than they otherwise would be.
The thing to remember is that a public plan that does not receive subsidies is essentially a non profit insurance company, and we have always had non profit insurance companies and for the well run ones the overhead costs have always been a little lower than the costs of for profit insurance companies, yet the for profits have always been able to compete successfully against them. In addition, the non profits have always found it necessary to invest heavily in marketing and to seek high investment returns on their reserves in order to compete successfully against the for profits.