How do private insurance companies make a profit?

[hedgehog]

Is the profit money left over from premiums after paying medical expenses, or is the profit from taking and investing the premiums, then paying the expenses from the proceeds of the investments and pocketing the rest?

Also, do the heads non-profit insurance companies pay themselves as much as the heads of for-profit companies?

[SoCalDem]

1. They skim off 35% (or more) off every dollar you send them

and then they refuse to pay for services you think are covered..

(for starters)

you pay thousands of dollars for a little plastic coated card for your wallet, and then "hope" they pay for what they say they will

[valerief]

2. Overcharge, invest, underprovide. Legal Sally Tomatoes. nt

[Gormy Cuss]

3. Most of the profit comes from investments.

Even if all of the premium money paid was paid out by the end of the year it's possible for a company to remain in the black because of the earnings from investments. Naturally, it's even better for the insurance companies if they don't pay out anywhere near as much as they bring in with premiums and that's why they expend so much effort in delaying and denying claims.

I don't know of any non-profit insurance companies so can't address that question.

[Texasgal]

4. private insurance companies

only pay doctors a certain amount which is usually less than what the doctor or procedure would cost.

IE: Let's say a cataract removal is 10,000. The doctor contracts with the insurance company, said company pays 5,000 and the doc must "write off" the remaining five grand.

[hedgehog]

9. When I was a kid, we used a pancake syrup we called "29 cents off".

I think the brand name was Staley's, but the label always had 29 CENTS OFF! in bright yellow letters for as long as we could remember.

Who knows what anything really costs when it comes to healthcare? Between doctors writing off fees and hospitals charging $500 to for three stitches in the ER, it's worse than buying an airline ticket.

One of the concerns out there is that Medicare doesn't pay enough. Maybe if we were all on single payer, the doctors and hospitals wouldn't spend so much on billing clerks and accounts and they'd do just fine on current Medicare fees!

[FarCenter]

5. As a example see United Healthcare Groups SEC filings

There last quarter 10K is at http://www.unitedhealthgroup.com/invest/2009/UHG_Q2_200...

The last quarter revenues were $21,655 million, of which $19,746 were premiums and $153 were investment income. So investment income is very small portion of revenues.

Their operating costs were $20,215, of which $16,507 were medical costs.

Their gross earnings were $1,440, from which they deducted $139 of interest costs and $442 in taxes, leaving net earnings of $859.

Since their interest costs largely offset their investment income, at least UHG does not seem to make any significant money from investments. Payments of claims, along with operating costs, depreciation, etc, account for most of their income from premiums.

On their balance sheet, they only list $13,163 in long term assets. This is the equivalent of a little over 2 months of premium income.

So it is mostly a pay current claims out of current premiums business.

[SoCalDem]

6. ponzi, comes to mind

[FarCenter]

7. It does appear that they might go broke in certain kinds of epidemics

For example, if a large number of their subscribers contracted bird flu and required extended hospital stays with days in intensive care units on ventilators, they might burn through their reserves.

On the other hand, cash flow is probably limited by the number of ICU beds and the number of ventilators, so that would limit their cash burn rate. Besides which, most epidemics would result in the deaths of many chronically ill and expensive subscribers, thereby increasing profitability in future quarters if UHG survived the cash crunch, possibly by slow-paying the hospitals during the epidemic.

[madrchsod]

8. that`s why they are waging an all out war on single payer....

or medicare buy in. they`ll be reduced to selling sup insurance or boutique plans.

[Telly Savalas]

11. Life insurance in contrast gets much more of its revenue from investments.

For example, of $51 billion in reveneue in 2008, MetLife earned about $16 billion from investments. This 30ish percent is much greater than the 7ish percent for United cited above. This percentage was even greater in previous years when the market didn't suck so much.

http://phx.corporate-ir.net/External.File?item=UGFyZW50...

[FarCenter]

12. Whether investments are involved would depend on the product

Whole life, annuities, and various retirement plan products are heavily investment oriented.

Term life, health, fire and auto are mostly current premiums fund current payouts.

Other property insurance may involve a heavier investment component if seldomly occuring major risks like hurricanes and earthquakes are covered.

[andym]

13. A quick calculation show that premiums exceeded medical costs by 19.6%

for a total cost of 3239 million (3 billion) dollars.

19746 million (premiums) - 16507 (medical costs) = 3239 million excess funds from premiums
3239/16507= 19.6%

the excess funds went to pay their costs-- their operating costs (ceo salaries etc) exceeded medical costs by
20215-16506=3709 million or 22%.

So, compare their overhead with the 3% of Medicare.

[Gormy Cuss]

14. One of their expenses is lobbying.

from today's L.A. Times:

http://www.latimes.com/news/nationworld/nation/healthca...

In the first half of 2009, the health service and HMO sector spent nearly $35 million lobbying Congress, the White House and federal healthcare offices, according to data from the Center for Responsive Politics.

With more than 900 lobbyists, that sector -- whose top spenders are insurance giants UnitedHealth, Blue Cross Blue Shield and Aetna -- was poised to spend more than in 2008, a record lobbying year.

UnitedHealth spent the most, $2.5 million in the first half of 2009, and hired some of Washington's most prominent political players, including Tom Daschle, the former Senate majority leader who served as an informal health policy advisor to Obama.

Apparently they're making enough profit to want to hold onto this line of business.

[Orsino]

10. Very well, thanks. n/t