In an ideal world, nearly every dollar that is expended toward health care would be spent on evaluation, testing, treatment or prevention of disease and injury. The goal would be to expend all the money on improving the health of the population being covered. In this country, that is currently not the case, and there are several reasons.
The first area is administrative costs of our health insurance system. When an insurance company receives payment of premiums, the money is used in three basic ways.
First is for the actual expenditure for health care services. Collectively within the insurance industry this is known as the Medical Loss Ratio. Under the Patient Protection and Affordable Care Act, passed in 2010, this ratio should not be less than 80 percent. This still means that four out of every five dollars paid in as insurance premiums is spent on the other two items, including the cost of running the company. I once calculated that it took the entire premium of 6,500 policy holders just to pay the salary of the president of one large insurance company. Two percent of all premium dollars is spent by the insurance companies just to "credential" the physician panel of providers in most managed care programs. For a company that is "for profit," the third item is payment of dividends to the shareholders.
The second area of hidden expense involves the cost of the provider to "process the claim."This is the billing function.
Since the patient does not usually pay cash on the spot for the service, the provider must have a billing staff to create a bill, send it on to the insurance company or companies and await payment. If there is a co-pay it should be collected at the time of the service but often is collected after the fact. If the patient has a deductible on the insurance, the company will pay only a portion of the claim. This means a second bill back to the patient. It is estimated that the cost of processing and sending in a single claim is about $6-7 each time it is processed.