This year is shaping up to be very profitable for the health insurance industry, as many medical insurance carriers are reporting better than expected profits. While the health insurance industry has always been very cyclical in terms of underwriting profits (what is leftover after collecting premiums and paying claims and administrative expenses) for most insurers, this year’s boost is attributable to the Great Recession. Individuals and families are simply cutting back on expenses to make ends meet, including healthcare. Several insurers, including California giant Anthem Blue Cross of California, acknowledged their customers are using fewer healthcare services than expected this year due to the economy.
Prior to the new healthcare law, called the Patient Protection and Affordable Care Act (PPACA), profits from a good year would be retained by the health insurance company and used to offset years that are not so profitable. Contrary to popular myth, the health insurance industry averages only 2-7% profit in most years, while the top ten industries on the Fortune 500 list of companies earn between 9% to 20%. The typical overhead expense for a health insurance company is 13%.
When the new healthcare law was enacted on March 23, 2010 it contained an important provision called the “minimum loss ratio” or MLR for short. Its purpose is to make medical insurance more affordable for Americans by requiring health insurance companies in the individual medical insurance marketplace to spend no less than 80% of every premium dollar collected from customers on claims. This includes healthcare expenses, such as hospitalization, surgery, preventive care, office visits, x-ray, lab and prescription drugs. Health insurance companies can also consider expenses associated for “quality improvement initiatives” toward the 80%. Quality improvement includes expenses for programs that help improve the overall health and wellness of members, such as health risk assessments, biometric screening, health coaching and wellness programs.
Before the new healthcare law, most health insurance companies in the individual market spent less than 80% on claims (many in the 65% to 75% range) because their administrative costs, agent commissions, preferred provider access fees, premium taxes, target profit, reserves and other overhead exceeded 20% of every premium dollar collected. In order to comply with the MLR requirement, health insurance companies have been forced to reduce their non-claim expenses. Savings has come from drastic cuts in agent commission and lowering target profit goals.
Many nonprofit insurers, such as Blue Shield of California have been criticized for seeking large premium increases and maintaining overly generous reserves. As a result, Blue Shield of California will be giving back $451 million this year to their 2 million customers. This represents the equivalent of a 7% reduction in annual premiums, nearly an entire month’s worth of insurance cost.
Opponents of the new healthcare law contend that in 2012 and beyond, consumers can expect higher medical bills and more expensive medical insurance, as new benefit mandates and other regulations become effective. Health insurance companies say that since the price of individual medical insurance is function of the cost of healthcare, premium refunds may not be substantial this year and even non existent next year because the cost of medical care is growing so fast.
While the MLR may help lower the cost of medical insurance for some individuals this year, the net impact of the new healthcare law on the cost of health insurance will not be known for several years because there are new costly mandates that become effective in 2014, such as:
- Coverage for “Essential Benefits,” such as maternity, must be provided by medical insurance plans, and
- Any adult applying for an individual medical insurance plan must be accepted regardless if they have a pre existing health condition (referred to as the “guarantee issue” requirement).
Some industry experts expect individual medical insurance to increase more than 80% to 100% to cover the cost of these new provisions. While one of the primary goals of the new healthcare law is to make health insurance more affordable for all Americans, health insurance may end up being highly unaffordable.