Download PDF Report >>> Lines of Business Obscure Profit Margins
FACT CHECK: In 2009, the percentage of premiums that went towards administrative costs and profits declined for the sixth year in a row and have been consistent for decades.
FACT CHECK CHECKED: America’s Health Insurance Plans (AHIP) combines self-insured line of business (LOB) and insured LOB and presents the results as if it were one homogeneous market. Nothing could be further from the truth. Size wise, the ratio of self insured LOB to insured LOB is roughly 58% / 42% of self-insured / insured or underwritten.
Insurers charge self-insured (ASO – administrative service only) groups an administrative fee that, for the top 10 health insurers, averaged 6.94% of costs. That translates to 6.5% of “premiums” which are really medical benefits plus service fee income. This “efficient” administrative expense is not evident in the insured LOB.
To identify the administrative costs and profits for the insured group, one computes and then removes the self-insured revenues and expenses from the CMS Totals as shown in the table below. Sources and stepwise methodology (top to bottom) are shown in the far right column.
The claim that insurers’ average percentage of premiums that went towards administrative costs and profits was around 11.75% (and have been consistent for decades) totally obscures two radically different lines of business with divergent expense ratios. For 2008, self-insured admin costs and profits were about 6.5% for self-insured groups, but about 18% for insured groups. Since the profit margin is VERY slim for the self insured, the bulk of profits are born on the backs of the insured groups which include small business and individuals. A reasonable question to ask is “why are insurers satisfied with profit margins of well under 1% on 55 % of their business but feel a need to push margins well beyond 10% on 45% of their business?” Though risk is a small factor in the insured LOB, they have to compete far harder on self-insured LOB than on insured LOB where they hold oligopoly power in local market areas and convert that market power into profits.
Download PDF Report >>> Lines of Business Obscure Profit Margins
Filed under: Analyses, Health Costs, Health Insurers, Healthcare Reform, MLR - Financial Ratios | Tagged: insurance profits, Line of business, LOB, medical risk, profit margins, Self-insured, underwritten | Leave a comment »
Health Reform Trends, Research and Analysis 
Consider Having only two Insured Groups – Self-Insured and Community Rated
Download PDF Report >>> Consider having two insured groups
Anthem’s recent announcement of rate hikes of up to 39% highlights a serious problem with the health insurance industry. Despite public consternation, Anthem can justify the increase using legitimate risk analysis. The problem is not entirely Anthem. The problem is a marketplace in this country that defies logic, and has done so for decades. All private health insurers including Anthem are benefiting from this absurdly inefficient market.
The U.S. is not one single homogeneous insurance market. Rather, it is multi-tiered divided between government and private. Government pays almost 50% of all medical costs for the 30% of population on Medicare and Medicaid. The private market is further divided into self-insured and risk segments, roughly split 50:50 by population.
The self-insured consist of large enterprises that have so many members that it costs more to buy insurance than to pay medical expenses themselves and have insurers only administer claims. Insurers make a profit on administrative expenses, but nothing on medical costs. Medicare operates the same way as self-insured, contracting membership and claims to insurers. Insurers make nothing on any self-insured claims because the insurers carry no medical risk.
Service fees on self-insured groups of the top 10 insurers average 6% of insured premiums. Medicare overhead runs even less. Adding government and self-insured costs, some 75% of all insured U.S. health care is administered with expense ratios of about 5%. Continue reading →
Filed under: Commentary, Health Insurers, Healthcare Reform | Tagged: adverse selection, Anthem, community rated, expense ratios, experience rated, high-risk reinsurance, Medicaid, medical risk, medicare, Modified community ratings, rate hike, risk, risk consequence, risk likelihood, Self-insured, service fees, Wheel of Fortune | Leave a comment »