259756 Unhealthy profits? Three ways insurance companies make money from health care

Tuesday, October 30, 2012

Stephen D. Hooper, MBA , Health Economics Group, Inc., Rochester, NY
Health administrators and others who influence the provision of health care coverage to large groups of individuals should consider an approach that differs from how insurance companies typically operate. Insurance companies will be integral to Insurance Exchanges if the Patient Protection and Affordable Care Act (PPACA) remains viable. They also are likely to be part of alternative approaches to health care reform. These organizations often are criticized for earning high profits while many of the public are uninsured or under-insured. Critics of health insurance companies should understand, specifically, how these organizations earn their profits. Insurance companies realize profits by setting premium levels higher than might be necessary (by including actuarial contingencies) and by betting that actual benefit payments will be lower than the estimates included in premium calculations. Additional earnings come from short-term investment of the premiums they collect: premiums are received at the beginning of a month, but claims payments often are paid several weeks later. Finally, insurance companies earn profits related to the administrative charges they include in premiums. Large employers, union groups, and municipal government entities commonly use a different, “self insurance,” approach. They hire insurance companies only to perform certain administrative tasks. Under this approach, the insurance companies are motivated to become more efficient, but they have neither incentive nor authority to deny care or hype premium levels. These matters are the responsibility of the health program's leadership. Administrators responsible for Insurance Exchanges and other health benefit programs need not cede control to health insurance companies.

Learning Areas:
Administration, management, leadership
Biostatistics, economics
Program planning

Learning Objectives:
Describe the methodology health insurance companies employ to set premiums. Identify the aspects of health benefits program management that might best be delegated to an insurance company. Identify the aspects of a health benefits program that should be controlled by program leadership.

Keywords: Health Care Politics, Management

Presenting author's disclosure statement:

Qualified on the content I am responsible for because: I head a firm that designs and manages employee benefit programs. The firm has worked with health insurance companies, and for ten years managed self insured medical plans. One of my interests is the intersection of medical plan economics, and plan design, and plan management.
Any relevant financial relationships? Yes

Name of Organization Clinical/Research Area Type of relationship
Health Economics Group, Inc. Health plan management Employment (includes retainer) and Stock Ownership

I agree to comply with the American Public Health Association Conflict of Interest and Commercial Support Guidelines, and to disclose to the participants any off-label or experimental uses of a commercial product or service discussed in my presentation.