Hi, I’m from the UK, the healthcare industry in the US has always confused me but one thing I can’t seem to get my head around is how the insurance companies don’t go bankrupt.
I understand how insurance companies work in the fact that they accurately calculate premiums and invest the money whilst not receiving more claims than premiums.
However, in the healthcare industry wouldn’t they receive many claims on a regular basis? Especially from people who require medication on a regular basis e.g Insulin
Furthermore, with hospitals bills and medication being so expensive will they not payout more in bills than they receive in premiums from people?
In: Economics
Averages. There is a thing called the law of large numbers that says if you take a random thing, and run it enough times, you will tend towards the average result overall.
The health insurance companies (and we have them in the UK as well) use past data to predict how much they will have to pay out in any one year. With enough customers they can get a good idea of how many will get sick or need other treatment, how much that will cost, and then how much they will need to charge. On the individual level one person can have a good year and need no payouts, or a person can have a really bad year and need hundreds of thousands of dollars – but on the average person will need some average amount of payout, and so all the insurance company needs to do is charge a bit more than that.
If they find themselves paying out too much they can always put up their prices for next year.
And historically, US healthcare insurance companies charged significantly more than they paid out. The Affordable Care Act (Obamacare) introduced an “80/20” rule, whereby healthcare insurance companies had to spend at least 80% of the premiums paid to them on actually providing healthcare. If they didn’t they had to reimburse their customers the difference. In the first few years insurance companies ended up returning billions to their customers – some had got at low as the high 50s% in terms of how much they were actually spending on their customers (the rest going to marketing, admin, bonuses for senior staff, and profits).
> Furthermore, with hospitals bills and medication being so expensive will they not payout more in bills than they receive in premiums from people?
The insurance companies have a whole bunch of tricks to avoid paying out as much. Deductibles (the customer has to pay the first few thousand of any one bill), caps on spending, negotiating with the healthcare providers (a common ‘trick’ where the provider will charge 10 or 20 times what they actually need to, and the insurance company “negotiates” down to only paying the base rate – meaning those without insurance end up paying far more, and the insurance company looks like it is doing a good job).
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