The New Corporate Welfare Queens—Health Insurers On The Dole

Guest Post By Chris Pope At The Manhattan Institute

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.