Unintended consequences? About limiting insurance companies to 20% of premiums on admin and comp …

Reid thinks he was really clever with the ObamaCare provision that limits insurance companies to spending 20% or less of premiums collected on SG&A — sales, general & admin costs — including exec comp.

Ken’s Bet: It’ll cause healthcare costs and premiums to go up.  Here’s why …

Assume that Acme Insurance currently collects $7.5 million in premiums — pays out $5.25 million to healthcare providers (docs, hospitals, pharmacies, etc.) — and spends $2.25 million (30%) on SG&A.

Reid thinks his rule will cut premiums by about $1 million — thanks to a roughly $1 million cut in SG&A.

WRONG !

Here’s a more likely outcome:

Acme holds its SG&A constant and simply starts selling more liberal plans (maybe all the way up to the Cadillac limit) to force fit within the 20% limit — for example, Acme charge $11.25 million in premiums to cover $9 million in payouts ( lower co-pays & deductibles, more botox) and allow $2.25 of SG&A (20% of $11.25).

PRESTO!

Rather than healthcare costs coming down and premiums getting reduced, premiums and healthcare expenditures go up by 50% … SG&A stays the same … insurance execs still drive fancy cars.

Ken’s Take: The DC boneheads have zero conception of how businesses run …

2 Responses to “Unintended consequences? About limiting insurance companies to 20% of premiums on admin and comp …”

  1. Laj Says:

    I think your scenario assumes that there are no competitive pressures. That’s possible but highly unlikely.

  2. Dave Anderson Says:

    I think your scenario accurately reflects a tacit agreement between insurance companies going forward. In business, cutting admin and comp is seen as a reduction in competitiveness.

    Increasing compensation increases competitiveness because you hire better employees. Cutting Admin boils down to purging the bottom 20% based on performance, and that only happens in down cycles.

    What is included in this definition of “Admin?”

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