Network News

X My Profile
View More Activity

Breaking Down Insurance Company Profits

Uwe Reinhardt walks you through WellPoint's most recent income statement. It's useful stuff. I'd particularly direct reader attention, however, to the breakdown of revenues:

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.

By Ezra Klein  |  September 25, 2009; 12:23 PM ET
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Medicare Part 'E'
Next: Lunch Break


Are you still going on about administrative costs? Really? Wow.

So if big evil private companies are only concerned about the bottom line then why would they do anything they didn't think they needed to do in order to compete effectively in the market?

Posted by: fallsmeadjc | September 25, 2009 12:59 PM | Report abuse

Aren't self-insured companies running a kind of small profit center off of their own employees, pocketing the percentage of premium revenue not used for treatment for themselves? I'm not saying they shouldn't do that, but doesn't it lead to potentially perverse incentives?

Posted by: dday212 | September 25, 2009 1:03 PM | Report abuse

Know what the most profitable line of business is for the country's biggest insurance company?

A Medicaid HMO. Americhoice (UHC).

Put that in your pipe and smoke it all you "oh, we can't compete against public options..."

Where in the country in Medicaid putting Americhoice out of business? Anywhere?

Posted by: ThomasEN | September 25, 2009 1:04 PM | Report abuse

More than half of Americans who get their health care coverage from their employers get it through self-funded plans. Such companies generally also buy stop-loss insurance to cover really big claims, so that cost should be figured in. Also, I believe that the biggest administrators of such plans are not health insurers per se but companies that specialize in administering plans they don't insure. I believe that serving as a TPA can be quite lucrative.
A few things I'd like to know about self-funded plans: 1) how much leverage do self-funded companies have in controlling costs? Apparently not that much, since self-funding constitutes the bulk of employer-provided health care. 2) How tightly regulated will self-funded plans be under the various reform bills. As of now, they're regulated under ERISA and exempt from state insurance regulations. 3) Are employers' incentives so perfectly aligned in self-funded plans? Sometimes small companies face excruciating choices in deciding whether to cover a condition that the TPA says they don't have to cover.
Keep in mind that Nataline Sarkisyan, the 17 year-old who died after an initial coverage denial for a liver transplant, who was made a cause celebre by John Edwards, was covered under a self-funded plan. Cigna made the denial, but Nataline's father's employer (was it Mercedes?) that was on the hook to pay.

Posted by: sprung4 | September 25, 2009 1:31 PM | Report abuse

Ezra, just as a purely academic exercise, this blows me away, because elsewhere in the WellPoint statement, the company notes that its enrollment of covered lives between fully-insured vs. self-insured/administrative-services-only is roughly 50-50.

Yet the revenue differential is 93-6.


Posted by: Rick00 | September 25, 2009 1:42 PM | Report abuse

Rick00, I don't think you really understand what you're describing. There is no "Wow" factor to those numbers. What you're missing is the "premium equivalents", or the amount of money paid by the self-insured employers to cover claims costs. The revenue they're reporting for ASO business only reflects the revenue they get administering the business (and some stop-loss premiums as well, the self-insured employers also reinsure with the insurance co to cover catastrophic losses).

The revenue numbers would not end up equal, because likelihood of self-insuring is correlated pretty heavily with group size (the larger employer, the easier it is to self-insure as your claim costs become more predictable), and smaller groups have higher risk and are more costly to administer, so they pay more. But the 93-6 split you seem to assuming is indicative of something dastardly about the insurers is not.

Posted by: ab13 | September 25, 2009 2:00 PM | Report abuse

Most insurance companies are also TPAs - while the margin is much smaller, there is essentially no risk for the insurer (kind of like holding t-bills in your 401(k)). The insurance companies reap an additional benefit from these arrangements in that the covered lives increase their "in-network" numbers giving the insurance company more bargaining power with providers.

Posted by: danwhalen2 | September 25, 2009 2:17 PM | Report abuse

Aren't self-insured companies running a kind of small profit center off of their own employees, pocketing the percentage of premium revenue not used for treatment for themselves? I'm not saying they shouldn't do that, but doesn't it lead to potentially perverse incentives?

Posted by: dday212 | September 25, 2009 1:03 PM | Report abuse

most self insured plans factor what portion the employees pay by their "cobra equivalent rates", ie the fully insured equivalent rate. Sometimes this could work in their favor but most times it doesn't. Also factor in that most insurers (including self insurers and TPA's) require employer's to cover at minimum 60-70% of the total premium and its not the gold mine you think. In fact its downright crippling for many employers. I can't tell you how many times I've gotten calls from former employees ready to call the Dept of labor on an employer saying they're "jacking up my COBRA rates because I left" and I have to nicely tell them, no, that's what your healthcare costs. People really have no idea.

oh and sprung that's a good point about that case. While its Cigna's responsibility to manage the care for the employer (you said Mercedes although I'm not sure who it was either) there is a provision called ex-gratia where the employer can make the choice to pay the claims outside the terms of the contract so if Merecedes was aware of it they absolutely could have waived the magic wand and covered it. The problem as an employer is once you start to wave that wand, its next to impossible to stop and when you do stop, who is going to justifiably cry foul that you stopped just before they needed something vital. I'm not saying its right, just explaining it.

Posted by: visionbrkr | September 25, 2009 11:12 PM | Report abuse

oh and if pseudo comes around he'll blast me for this but the average small business person and even more importantly the average employee of the small business person will have absolutely ZERO CLUE when handed an option of 30 different insurers. You think they're lost now with one or two options their employer offers. Their brains will explode. Don't get me wrong I like the exchange and it will be good and making small employers into large ones will help somewhat in costs but my God its going to be a mess. And if its set up for everyone to opt into the exchange say January 1st of every year, it'll be like every train in the US coming into Penn Station at exactly the same time.

Posted by: visionbrkr | September 25, 2009 11:24 PM | Report abuse

The comments to this entry are closed.

RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company