Breaking Down Insurance Company Profits
According to WellPoint’s income statement for 2008, the company’s total revenue that year was $61,579.2 million. Of that, 93.2 percent came from premium revenues, and 6.3 percent came from fees for merely administering the claims of employers who self-insure (that is, these firms set aside their own funds for their employees’ health benefits and bear full risk for them).
That's how about 45 percent of the insurance market functions, incidentally: Large employers self-insure and contract with a private insurer to take care of administrative tasks. It's much less lucrative for insurers, but it's much better for the market. For one thing, the administrative costs are far lower. In the small-group market, which is served by private insurers, administrative costs can be 25-30 percent of premiums. In the large-group market, which mainly looks at self-insured companies, those costs are around 7 percent. For another, the incentives are less misaligned. Your employer, after all, has a material interest in your health.
One of the big questions about health-care reform is how much it makes the individual and small-group markets like the large-group market. That's definitely the vision behind the exchanges, but it's hard to say whether it'll work.
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