It is a lucrative time for the health insurance industry. This year, the largest carriers have reported record profits, and the stock prices of major insurers have risen more than eightfold since 2010, greatly outperforming the S&P 500 index. But the share of Americans purchasing private insurance has fallen steadily since the 1960s, so what gives? Insurers’ surging profits owe largely to their new favorite customer: Uncle Sam.
A half-century ago, Americans were covered either by privately purchased health insurance or by government programs that paid directly for medical care. But the rapid growth of Medicare Advantage, Medicaid managed care, and the Obamacare exchange plans means that around 100 million Americans now receive publicly subsidized health care administered by private insurers.
The government is catching up with employers (who cover 158 million people) as the insurance industry’s main source of revenue. And insurers’ profit margins on Medicare and Medicaid enrollees in 2022 were more than twice as high as those on sales to employers and individuals. As a result, McKinsey estimates, public revenues will account for almost two-thirds of insurer earnings by 2027.
Using private insurers to administer health-care entitlement programs was originally intended to save taxpayers money. In the 1990s, managed care achieved a historically unique slowdown in the growth of private health-care costs by negotiating discounts, steering patients toward cost-effective providers, and reducing inappropriate utilization. Policymakers sought to bring this dynamic to the public sector.
In many ways, allowing elderly and disabled Medicare beneficiaries to opt for privately administered Medicare Advantage (MA) plans has been successful. Plans are paid up-front in monthly fees to deliver Medicare benefits to recipients, providing an incentive for insurers to forestall costly hospitalizations. Medicare Advantage participants have seen better health outcomes, and changes in medical practice styles have generated spillover benefits even for those not in the program. These plans have used funds to reduce premiums and out-of-pocket costs and to pay for normally uncovered supplemental benefits, such as dental care. The share of Medicare beneficiaries enrolled in MA has leapt from 19 percent in 2007 to 52 percent in 2023.
Payments to MA plans are based on average spending levels under the government-managed Medicare plan, adjusted for recorded differences in patients’ medical needs. But the congressional Medicare Payment Advisory Commission (MedPAC) has recently concluded that the government is overpaying private insurers by $83 billion, because payment incentives have led insurers to be disproportionately expansive in documenting patients’ medical conditions.
A similar desire to generate savings with managed care fueled the expanding private administration of Medicaid, in which 74 percent of Medicaid beneficiaries were enrolled in 2021. But a 2018 Congressional Budget Office assessment noted that, while “states have argued that Medicaid managed care reduces spending and improves outcomes,” studies “have not found evidence to support those claims.”
States can claim between $1 and $9 in federal funding for every $1 of their own resources that they spend on Medicaid—without an upper limit. This extraordinarily generous arrangement is limited to expenditures on covered health-care benefits for eligible low-income beneficiaries, however. To circumvent these restrictions, states have claimed waivers from the program’s rules—letting them obtain federal funds for nonstandard purposes.
Though the federal government resists approving waivers that raise overall program costs, states can make net increases in noncovered program expenses hard to identify by aggregating funds for various services into lump-sum payments to insurers. Axios recently reported that Medicaid insurers were spending billions of dollars on new “affordable housing” and “philanthropic” ventures—failing to mention the incentives they have to undertake extraneous expenditures to win contracts from state officials, largely paid for with federal money.
The absence of premiums or out-of-pocket costs for Medicaid recipients has made the program highly vulnerable to improper payments. In 2022, 26 million of the 88 million Americans in Medicaid and the Children’s Health Insurance Program, for which insurers received monthly payments from the government, didn’t even know they were enrolled. Employer-provided insurance plans already covered many of them.
Similar problems have afflicted the Obamacare exchange. To boost demand for these privately managed plans, Congress and President Biden expanded subsidies so that Washington would pay 100 percent of premiums for families of four with incomes less than $46,800. This led to a surge in participants, and half of those in exchange plans now get free coverage. Yet, the Biden administration’s eagerness to boast of rising enrollment, regardless of the cost to taxpayers, led to insurance brokers fraudulently enlisting tens of thousands into plans without their consent.
Due to the extent of subsidies, few Obamacare exchange participants are price sensitive when selecting plans. In 2023, 79 percent received subsidies that automatically increase with benchmark premiums. This has encouraged insurers to push up prices.
Seeking to inflate its revenues, the health-care industry has fostered an exaggerated view of the importance of insurance coverage. Through a combination of payments for services by patients and direct subsidies to hospitals, America’s uninsured receive about 80 percent of the medical care they would get if they were insured. Enrollment in Medicaid increases utilization of medical services, boosts medical provider revenues, and reduces patients’ out-of-pocket costs—but it does not significantly improve measured physical health outcomes.
To curb the overpayments, Congress should, first, let the Biden-era expansion of exchange subsidies expire, and allow the establishment of a parallel, fully privately financed insurance market. Second, it should cap Medicaid payments to states, so that states and insurers can’t claim federal funds to pay premiums for beneficiaries whom they know will use no care. Third, it should pare back payments to Medicare Advantage plans, so that insurers get the same amount for covering Medicare patients as the federal government would spend purchasing health care for them directly.
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