One of the right’s favorite arguments against health care reform is that private insurance is inherently more efficient than public programs like Medicare.

It works as propaganda because it’s consistent with the public’s deeply held skepticism of government. But it’s just not true. And this week Wall Street gave us yet more proof of that.

It happened yesterday after Aetna, one of the nation’s largest insurers, released its first-quarter earnings report. Earnings were up more than 3 percent – the kind of news that, one might suppose, Wall Street would greet with glee. Not so. Shares actually plummeted...

...by more than 20 percent. The reason? I’ll let the Los Angeles Times explain:

Analysts attributed most of the sell-off in Aetna shares to an increase in the company's "loss ratio" for medical, dental and other health insurance products. The ratio — the amount paid by Aetna for covered services divided by the amount of premiums collected — was 79.4%, up from 74.6%.

In case the Times’ explanation isn’t clear, here’s what it means.

“Medical loss ratio” measures how much of the money going into an insurance program (as premiums) comes back out (as medical services). From a patient’s standpoint, a higher medical-loss ratio is generally* better, since it means you’re getting more services for your premium dollar.

But the very fact that Wall Street calls this measure the medical loss ratio is a hint about how the market views this number: From the standpoint of investors, spending a high proportion of premium dollars on actual medical services is bad, since it could mean the insurer is attracting beneficiaries with more serious medical needs or authorizing more services, all of which might cut into profits.

Sure enough, word that Aenta’s ratio was going up – i.e., that it was spending more money on its patients – provoked a sharp rebuke from Wall Street.

[More on this from the Wall Street Journal – subscription required.]

What’s truly disturbing about this is that, among the big insurers, Aenta already has one of the lowest medical-ratios in the business.

Oh, and how does this compare to public programs? About 98 percent of the money that goes into the Medicare program comes back out as medical services – in good part because the program doesn’t siphon off money for marketing and profits.

But, then, Medicare doesn’t have to satisfy investors. It has to satisfy voters. Big difference.

* Footnote for wonks: Keep in mind that an ideal insurance program, whether public or private, probably should spend some money on administration – say, for improving quality – that probably would reduce medical-loss ratios slightly.