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 …
The Homa Files 
December 24, 2009 at 3:32 am |
I think your scenario assumes that there are no competitive pressures. That’s possible but highly unlikely.
December 24, 2009 at 12:41 pm |
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?”