Unbiased Analysis of Today's Healthcare Issues

Private Health Insurance and Administrative Expenses

Written By: Jason Shafrin - Nov• 02•07

When I pay for health insurance, is most of my monthly premium going for medical care?  Or does most of the money go towards administrative expenses and insurance company profit?

John Aloysius Cogan Jr. of the Regulating Health Insurance blog finds that most of the money spent on insurance premiums in fact goes towards providing medical care.  The post looks at two Northeastern insurance companies: Blue Cross & Blue Shield of Rhode Island and UnitedHealthcare of New England.  The results are as follows:

  BC/BS UnitedHC
Medical Costs 84% 77%
Admin Expenses 14% 18%
Profit 2% 5%


While the administrative and profit costs are much higher for these two firms than for Medicare, the higher admin cost percentage does not tell the whole story. As mention on my July 27, 2006 post,  Medicare does not take into account the deadweight loss from the taxation needed to raise money to fund Medicare.  Further, Medicare assumes a zero cost of capital and likely is less vigilant about pursuing unnecessary claims than a private insurance plan.  And finally, a lower administrative cost may simply be due to the fact that Medicare spends more money per person (i.e.: the denominator of the administrative expense percentage grows large).

In 2005, for small employers, BC/BS cost $399/month and United Healthcare cost $392/month. The Regulating Health Insurance blog notes the following:

“Even if Blue Cross and United had slashed their 2005 small employer market administrative costs and profits by one-third, their base rates for 2005 would have still been quite high. Blue Cross’ rate would have been $377.30/mo. and United’s would have been $361.35/mo.

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  1. Not anybody says:

    It depends on who you are right? For some 500% goes to medical costs while others 0%.

  2. Before someone else goes there, I would like to point out that comparing these numbers to government programs (like Medicare) is not comparing apples to apples. Specifically, in government programs, the expenses for certain administrative functions (like pensions and payroll) are paid through other government agencies, so these costs don’t get added to the “administrative expenses” line for the health program. Also, Medicare is still mostly just paying bills, while private insurers are doing more quality and disease management oversight — the costs of which get counted as administrative.

    Thanks, Mike