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

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.