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What Universal Coverage Offers The Insured

One of the biggest challenges in health care reform is winning over people who already have insurance. Somebody who lacks coverage, or is on the verge of losing it, will have an easy time understanding why reform will be make his or her life better. Somebody who already has insurance is more likely to wonder, what's in it for me?

A new paper from the Center for American Progress Action Fund helps answer that question. The author is health policy expert Peter Harbage. The subject is the high administrative costs we find in the individiual insurance market.

It's long been known that when you buy insurance on your own, rather than through an employer or government, benefits cost more. Partly that's because it's more expensive for insurers to manage a thousand individual policies than it is to manage one company policy for a thousand employees. And partly that's because, in the individual market, insurers devote so much time and effort to screening applicants, in order to avoid the sickest beneficiaries. As Harbage notes:

The Congressional Budget Office estimates that 29 percent of premium dollars in the individual insurance market go toward administrative costs on average. This is more than double the average rate in the group market, where roughly 12 percent of employer-sponsored insurance premium dollars are spent on administrative costs. This has a real cost: The average policyholder on the individual health insurance market will spend roughly $300 more on administrative costs each year than if they purchased coverage through a group policy.  

The health reforms under discussion in Washington right now would seek to solve this problem. They would create a purchasing pool--in effect, a giant buyer's club--so that insurers could sell policies to individuals as if they were part of a group. That would cut down on administrative costs and bring to individual purchasers the same economies of scale employees at large firms now enjoy.

In addition, reform would force insurers to insure everybody, regardless of medical condition, and at the same price--vastly reducing (and, ideally, eliminating) the hunt for healthy beneficiaires.

In his paper, Harbage crunches some numbers to assess the impact. His conclusion:

it is possible to reduce health care administrative spending by more than $3.0 billion in 2009 and more than $40 billion over 10 years if all Americans had the option--and chose to--purchase coverage through a group market, such as an exchange or an employer.

To be clear, I'm not qualified to assess the arithmetic here. But intuitively, this sounds right. And if the quantity of savings are relatively small--remember, more than $2 trillion flow through the health care system every year--it's important to remember this is just one example of how universal coverage simplifies the system and, as a result, makes health care less expensive.

--Jonathan Cohn