Insurance companies are easy to dislike — dealing with claims and denials is genuinely frustrating. But if we're going to fix healthcare costs, we need to correctly identify what's actually driving them.

Health insurance companies have average profit margins of about 3-5%, according to data from the National Association of Insurance Commissioners. That's lower than most industries and far lower than tech or pharma. If health insurers operated at zero profit, it would reduce per-person costs by roughly $100-200 per year. That's not nothing, but it's not the source of the problem.

The ACA's Medical Loss Ratio requirement already mandates that insurers spend at least 80-85% of premium revenue on actual medical care. If they don't, they must issue rebates to customers. In 2022, insurers issued $1.1 billion in rebates.

So what actually drives costs? Hospital consolidation is a major factor. Research from the American Hospital Association shows that hospital market concentration has increased dramatically, reducing competition and allowing hospitals to charge higher prices. A study in the American Economic Review found that hospital mergers increase prices by 6-18% with no improvement in quality.

Administrative complexity is another huge driver. The U.S. spends approximately 34% of healthcare dollars on administration, according to a JAMA study — much of it driven by regulatory compliance, not insurance company bureaucracy. The coding, billing, and compliance requirements imposed by Medicare alone fill thousands of pages.

The third-party payment system itself is fundamentally broken. When patients don't see prices and don't pay directly, there's no market discipline on costs. Price transparency — knowing what a procedure costs before you agree to it — would do more to control costs than any insurance reform.

Insurance companies have flaws, but eliminating them wouldn't meaningfully reduce healthcare spending. Addressing the root causes — consolidation, regulation, and price opacity — would.