The idea that private health insurance firms are making money off of sick individuals is a widespread accusation made against them. But let us look at the numbers more closely and see where they lead. Do for-profit health insurers actually rake in excessive profits?
Irrational Profits from Insurance Companies?
One typical source of misunderstanding when discussing health insurance earnings is the prevalent practice of confusing revenue with profits. Large health insurance companies make substantial income because they receive premiums from a large number of people. However, regardless of the number of money carriers take in via premiums, the vast majority of it must be spent on paying out medical claims and enhancing the quality of healthcare. In spite of the fact that CEO compensation has increased at a significantly faster rate than average wages over the last several decades, it is often said that health insurance firms pay their executives too much.
Several pharmaceutical and biotechnology businesses, as well as medical/primary care organizations, are included in the top 40 corporations by CEO compensation, however, there are no health insurance providers among them. And in 40th rank as of the year, 2020 was the online health insurance brokerage GoHealth. Although a CEO’s pay of $700,000 or $850,000 may appear excessive to the regular worker, it is actually quite standard in the business world (this is a separate problem that needs to be addressed).
However, health insurance firm CEOs are not among the highest-paid executives in the business world. Still, wages are included in the administrative expenditures that health insurers must cap in accordance with the medical loss ratio (MLR) guidelines established by the Patient Protection and Affordable Care Act. Likewise, earnings are up. A minimum of 80% of premiums collected from individuals and small businesses must be allocated toward paying for covered medical expenses and enhancing the quality of care provided.
All administrative expenses, including profits and wages, cannot exceed 20% of premium income. Insurers offering Medicare Advantage and other policies to big groups must meet a minimum MLR level of 85%. If an insurer fails to adhere to these criteria (i.e., spends more than the allowable proportion on administrative costs, for any reason), it must reimburse the policyholders and their employers. Insurers will return about $7.8 billion to policyholders between 2012 and 2020 as part of the MLR rule implementation.
Both Medicare Advantage and Medicare Part D plans are subject to the 85% medical claims and quality improvement expenditure threshold established by the Affordable Care Act’s medical loss ratio standards (i.e., the same as large-group health insurance plans). If an insurer repeatedly fails to fulfill this standard, it will be unable to accept any new customers.
What is the Health Insurance Industry’s Net Profit Margin?
When compared to other industries, health insurers often have very low-profit margins (in the single digits). Individual and family health insurance providers lost money in the ACA’s first few years but turned a profit in 2018 and have continued to do so ever since (thus, carriers are entering or reentering markets around the country). However, the profit margins in the banking, private equity, and commercial leasing sectors are all at least ten times higher than those in the health insurance sector.
Some areas within the healthcare business provide a disproportionate share of the industry’s revenue, and they include medical and diagnostic laboratories, biotechnology enterprises, and the pharmaceutical industry. However, the health insurance industry is far more heavily regulated, which contributes to the fact that it cannot achieve the same levels of profitability as other business sectors. By regulating overall administrative expenses (including profit) as a proportion of revenue, the ACA essentially limits the profits insurers may produce. However, healthcare facilities, gadget makers, and pharmaceutical companies are not subject to a comparable mandate.