Last week, an individual gunned down UnitedHealthcare CEO Bryan Thompson in the streets of Manhattan. The gunman wrote “deny,” “defend,” “depose” on the bullets he shot, suggesting that this killing was motivated by a dislike of UnitedHealthcare’s business practices, which are also the business practices of the private health insurance industry as a whole.

At the same time as that was going on, the American Society of Anesthesiologists, a lobbyist organization, criticized Blue Cross Blue Shield for declaring that it would curtail reimbursements for anesthesia care that goes beyond a certain level. This criticism generated a backlash that resulted in BCBS backing down from the policy.

The combination of these two events has jolted the US health care system back into the discourse in a way not seen since 2020, including many tweets and articles from prominent pundits like Matt Yglesias, Dylan Matthews, Noah Smith, and Eric Levitz. The quick consensus among these pundits is that dislike of the private insurers is overblown and that the main problem lies with providers and their overcharging ways. This conclusion relies upon several factual misunderstandings and very questionable analysis that I aim to correct below.

The Scourge of Administrative Costs

From a system design perspective, the main problem with our private health insurance system is that it is extremely wasteful. All health care systems require administration, which costs money, but a private multi-payer system requires massively more than other approaches, especially the single-payer system favored by the American left.

To get your head around why this is, think for a second about what happens to every $100 you give to a private insurance company. According to the most exhaustive study on this question in the US — the CBO single-payer study from 2020 — the first thing that happens is that $16 of those dollars are taken by the insurance company. From there, the insurer gives the remaining $84 to a hospital to reimburse them for services. That hospital then takes another $15.96 (19 percent of its revenue) for administration, meaning that only $68.04 of the original $100 actually goes to providing care.

In a single-payer system, the path of that $100 looks a lot different. Rather than take $16 for insurance administration, the public insurer would only take $1.60. And rather than take $15.96 of the remaining money for hospital administration, the hospital would only take $11.80 (12 percent of its revenue), meaning that $86.60 of the original $100 actually goes to providing care.

Put differently, private insurers currently have administrative costs that are 1,000 percent what they would be under single-payer while hospitals currently have administrative costs that are 158 percent what they would be under single-payer. The excess administrative expenses of both the payers and the providers are because of the multi-payer private health insurance system that we have.

When you add it all up, excess administrative expenses — defined as administrative expenses we have under the current system that we would not have under single-payer — are equal to 1.8 percent of GDP, or $528 billion per year.

Large numbers like that can be hard to understand, so I’ve prepared this chart below that compares the cost of excess health care administration to various other spending items:

In some ways, this chart is misleading because the spending on the other bars actually does something, whether fund important production or provide important income support. Excess health care administration does neither of those things. It’s just a total waste.

You know how often Republicans gesture vaguely towards the idea that the federal workforce is a do-nothing waste? While this claim doesn’t apply to the federal workforce, it is actually true of excess health care administration, which costs the country nearly twice what the entire federal workforce costs.

Imagine setting up an economic sector slightly larger in size than the entire public college sector but, rather than producing educational services for over 13 million students, it produced nothing except frustration and annoyance. That’s the extent and nature of excess health care administration in the US. It’s totally insane and waiving it off as a triviality is really misguided.

Provider Rates

One funny aspect of the recent discourse blip about provider payment rates is how at odds it is with the way things went the last time there was a public debate about the US health care system. During that period, ahead of the 2020 election, I was constantly having to fight with people and organizations who insisted that it would not be possible to cut provider payments as low as some single-payer proposals suggested. The argument from opponents was that doing so would result in some kind of mass exodus from and then collapse of the health care sector. Now, these rate cuts are being assumed as doable in order to argue that the ire directed at insurers is misdirected.

Beyond being funny in light of these recent discourse developments, this prior debate underscores an important point when it comes to discussing this policy topic, which is that how much you could save from provider payment cuts depends on how much you choose to cut them, with that amount bounded at the lower end by some squishy sense that, if the cuts go too far, then too few people will want to work in the medical sector.

Unlike with administrative bloat, which involves a literal wasting of labor and capital resources on something that has no value at all, the savings from provider payment rates are just a redistribution of rents from people who are actually doing important, productive work. Figuring out where legitimate compensation ends and rent begins is a much trickier task than figuring out how much work you could simply eliminate from needless health care administration.

With that said, there is no doubt that, even after wringing out half a trillion dollars in administrative waste, there is still a lot of room to cut provider payment rates from their current level. In the CBO single-payer report, the authors model two provider payment rate scenarios: a higher-payment-rate (HPR) scenario that assumes little to no cuts from the current weighted-average provider payment rates and a lower-payment-rate (LPR) scenario that assumes cuts that are around 10 percent below the current weighted-average provider payment rate.

In the LPR scenario, provider payment rates for hospitals would be cut by 50 percent relative to current private insurance rates while physician and prescription drug rates would be cut by 31 and 38 percent respectively. In this LPR scenario, the CBO finds that (I, II) the savings from provider payment rate cuts (after deducting the share of those cuts that go to reduced administrative expenses) would actually be considerably less than the savings from administrative efficiency, i.e. the savings from the elimination of the private multi-payer health insurance model.

Of course, if you decide to cut provider payment rates even lower than the LPR scenario, then you can achieve savings from provider payment rate cuts that exceed the savings from eliminating administrative waste. As noted already above, it really just depends on how far you choose to turn the dial bounded only by the need to maintain the desired level of medical services supply.

In the analysis so far, I have implicitly indulged this framing that we should attribute the blame for administrative waste on insurers while attributing the blame for provider rents on providers. But the provider rents are also, in some sense, caused by the private health insurance system. Medicaid and Medicare are able to negotiate much lower rates than private insurance, just as the public health insurer under a single-payer system would be able to. It is only within the private insurance segment of the system that providers have been able to jack up rates to such an extreme extent.

This is not to absolve drug companies and providers for taking advantage of the private insurance system (and the patent system) to line their pockets with rents. That is bad too. But keeping these rents in check is literally what we pay the insurance companies to do. That’s literally their job! It’s the job they are paid hundreds of billions of dollars a year to do and they either cannot do it or refuse to do it all while using the money we are all forced to give them to resist any efforts to have the government do it.

The failure of insurers in this regard is not just incompetence either. There is good reason to believe it’s malicious. Commentators often think that insurers want to bring down provider rates because they imagine that, if insurers can bring them down, then they could book more profit. But under the medical-loss-ratio (MLR) rules, insurer’s administrative expenses (which includes their profits) are capped at a percentage of how much they pay to providers. So the higher the provider rates are, the more profits insurers can actually book. Individual insurance companies have to balance this dynamic with their ability to attract customers with lower premiums, but the private health insurance sector as a whole actually benefits when provider rates are high.

Conclusion

Given all of this, I think it is totally fair for people to identify private insurers as the key bad actor in our current system. They are directly responsible for over half a trillion dollars of administrative waste and (at the very least) indirectly responsible for the provider rents that are bleeding Americans dry. The quicker we nationalize health insurance, the better.