The optics for health insurance providers are not all that great right now. With millions of people still without work and health insurance benefits, insurance companies are reaping billions in profits. Yes, there is more to it than meets the eye. Yet that doesn’t help the general public feel any better about the headlines.
According to Forbes, UnitedHealth Group reported net income of $6.7 billion for Q2 2020 as compared to $3.4 billion the year before. Anthem more than doubled their net revenue as well, reporting $2.3 billion this year as opposed to $1.1 billion in 2019. All across the board, health insurance carriers are increasing both net income and profits.
Paying out Less
So, how are they doing it? It is simple math. Hospitals, clinics, and doctors’ offices more or less stopped offering all elective care once the pandemic hit. Primary care offices closed. Elective surgeries were canceled or postponed. Virtually anything that was not necessary was put on hold in order to allow the healthcare system to focus on what thought leaders assumed would be a wave of coronavirus patients.
While almost all of the elective care was being put on hold, insurance companies continued collecting their monthly premiums. The results were inevitable. Regular premium revenue not offset by normal claim payments leads to higher profits. The question now is, what happens next?
Medical Loss Requirements
Unfortunately, the same headlines that declare how much profit health insurance companies are making usually fail to mention what is known as the medical loss ratio. Under the Affordable Care Act (ACA), health insurers are only allowed to make so much profit as a percentage of their total revenue. That profit is determined by the medical loss ratio.
Simply put, medical loss ratio quantifies how much a health insurer pays out in medical claims as opposed to how much money they take in. Dallas-based BenefitMall explains that the ACA requires health insurance companies to spend at least 80% of their revenues on paying claims, at least for most plans. In the case of certain large employer health plans, that number goes up to 85%.
The remaining 20% (or 15% were applicable) can cover an insurers non-claim expenses and profit. Let’s say an insurer reported a 70% medical loss ratio for the year. The remaining 10% would have to be returned to policyholders through either a cash rebate or premium reduction. But is that what happens?
Insurance Companies in Uncharted Territory
Washington recently began putting pressure on insurance companies to address their excessive profits. However, this is uncharted territory for them. Even though profits have soared in 2020, there is no way to know the ultimate financial toll the coronavirus crisis will have. Insurers don’t know what their coronavirus-related costs will be for 2021 or beyond.
In all likelihood, insurers will not be issuing sizable rebates to their policyholders. They are more likely to apply excess profits to 2021 premiums. That may mean very little to policyholders in real terms. Why? Because any reduction facilitated by excess profits could very well be offset by the routine premium increases that are expected to be implemented for 2021.
Policyholders will benefit slightly in that they will not see such drastic premium hikes in 2021. Some might even break even. The thing is that no one really knows. Until we figure out where coronavirus is going and how much it is going to cost in terms of healthcare delivery, it’s impossible to say how health insurance benefits will be impacted. Thus is the story of health insurance profits and premiums in the coronavirus era.