Administrative health care costs and executive compensation

Of the $2.2 trillion dollars spent on health care in 2007, 7% goes to administrative costs, amounting to the considerable sum of $155.7 billion dollars. America's unique reliance on the private sector to manage the finances of health care certainly contributes to this excessive spending.

The 13 largest health care insurance and managed care organizations had profits of $12 billion in 2007. We looked at executive compensation in the insurance industry and found that total compensation for 26 executives for 13 companies was almost $152 million. That amounts to one percent of administrative costs for just 26 people.

The magnitude of $152 million can be understood in terms of how much health care it could buy. The Kaiser Family Foundation estimates that per capita health care costs were $7,461, so the compensation for 26 people equals health care costs for 20,455 people. In the private market, where the average employer based insurance premium is $4,479, the $152 million could buy insurance for 33,890.

Applying the free market ideology to health care does not lead to market efficiency. A recent national survey by the Kaiser Family Foundation and the Harvard School of Public Health found that most Americans support limiting insurance companies' administrative expense and their profits. Americans are reluctant to support health care reform when it is presented as socialized medicine, but a single payer system could be supported if we can show that it keeps the private health care we love reducing the high costs of private sector insurance.