Economist: Marketing, admin represent biggest opportunities for health plans to cut costs

As health plans get the back of many legislators hands--sometimes being characterized as "the bad guys" of the entire health system--few critics stop and analyze just where the plans' money is going. According to one analysis by Princeton health economist Uwe Reinhardt, marketing and administration costs are a far riper target for cost cuts than other areas of the business, including the size of their profits.

In an analysis of WellPoint's most recent income statement (which, we can tell you, is more or less typical of its big-insurer peers), Reinhardt notes the following:

* WellPoint had 2008 revenue of $61.6 billion, 93.2 percent of which came from premium revenues and 6.3 percent of which was fees for administering claims for self-insured employers. One percent, meanwhile, came from interest on premium dollars as they flowed through.

* WellPoint paid out 84.4 percent of premium income for health benefit costs, including $48.2 million in healthcare reimbursements and $468.5 million in drug payments. This is a bit lower than some of its peers, but not off the map.

* WellPoint's selling expenses for 2008 were $1.8 billion, and G&A was $.2 billion. That's a full 14.7 percent of total revenue in 2008, clearly a significant number.

* After all of this, WellPoint's profit after all expenses and taxes was 4.07 percent, a respectable number but not anything exceptional.

Reinhardt's point, in laying all of this out, is simply that if the health insurance industry is going to cut costs significantly, it's inevitable that it will have to cut back on marketing and G&A expenses, which dwarf profits by a substantial margin. (Right now, few health reform discussions seem to focus much on this issue, but it may be thrown into much higher relief if current reform measures don't do much to reduce overall industry cots.)

To learn more about Reinhardt's analysis:
- read this blog entry  from the The York Times
- read WellPoint's income statement

Related Articles:
WellPoint hit by 61 percent loss in Q4 2008, plans job cuts
WellPoint pushes stock prices up, but not profits, by raising premiums
Aetna stock falls for Q1 '09 despite strong profits