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
Because we pay often $1500 a month for a family of four, and our employers pay as additional $800-$1500 on top of that. Most families don’t use $36,000 worth of health care each year.
Profit. Plain and simple.
Let’s simplify the numbers to make it easier.
Let’s say you have 100 people paying insurance each month.
Insurance cost $10 a month.
In one year they’ve paid $12,000.
In that one year, one of them has medical expenses equalling $500.
12,000 – 500 = 7,000
The insurance company made $7000 profit.
This doesn’t account for deductables or co-pays but it gets things going.
It also doesn’t account for the denied claims or for the fact the insurance company won’t be paying the same price as listed on the bill.
Now, consider that insurance companies have hundreds of thousands, or millions of customers and add in those deductables of 10s of thousands of dollars and you can see how profitable insurance is.
Bankruptcy isn’t a concern.
Insurance companies are no more than investment first…like airlines too. You pay in premiums, they invest and gain interest, and pay out claims when they feel like it
I own a healthcare clinic in the US – just outside of Boston, MA, and I have an MBA in healthcare administration, and these are the basics.
*Most important to remember* is that insurance relies on risk sharing. Not everyone is sick. A healthy person might go to the doctor once a year for their annual physical and a colonoscopy every five years. But they are paying the same price for insurance that a sick person who sees their doctor twice a month is paying.
Until the Affordable Care Act was enacted in 2010, an insurance company could deny coverage to an individual because of their health conditions. They could tell a person that because they had cancer or diabetes, they couldn’t buy coverage – insurance knew that they’d pay out more money on that person, and that would eat into their profits.
But also:
1. Health insurance is costly. Employers often pick up a chunk but a plan to cover a family of 4 can run about $2200/month to buy the insurance coverage.
2. Deductibles are high. Deductibles are the amount that the consumer must pay for before most costs are covered (there are usually some exceptions like an annual gynecology exam, but sometimes even that is subject to the deductible). So, you pay every month to purchase the insurance and you have to pay $500-5000 before insurance even starts to pay.
3. After you pay for your deductible, you most likely have a copayment (flat dollar amount you owe per service) or coinsurance (a percentage of the service cost). This amount is deducted from what the insurance company pays. So, if the insurance would pay $100 and you have a $20 copay, insurance pays $80 and you pay $20.
4. Insurance companies have “networks”. I sign a contract with the insurance company to take a discounted rate in order to make my company more attractive to consumers. If I didn’t sign the contract, I could still see patients, but they would have a much higher out-of-pocket cost, because the insurance company can’t dictate what I charge. Instead, they put that difference back on the consumer so they aren’t hemorrhaging money.
5. The insurance companies set **ridiculous** rules. Many procedures/treatments/medications need to be approved before furnishing the services. If they aren’t, the healthcare provider usually can’t bill the patient (if the provider contracted with the insurance company) – so the insurance company gets paid by the patient but they don’t pay out to the provider. And, all your coding needs to be correct. Any little mistake can and will cause a claim to deny.
The Affordable Care Act did set minimums on what must be spent on healthcare delivery and improvement activities themselves, and that has been helpful – but it’s been causing insurances to find other ways to make money, like buying healthcare clinics and loaning money with interest to clinics undergoing hard times like the hurricane.
Honestly, they’re just horrible greedy corporations that have very little interest in actually caring for individuals.
Most people don’t have chronic health conditions that require then to go to the doctor constantly.
I’m 54. I’ve had my tonsils taken out. I had surgery for testicular torsion, and I had hernia surgery. That’s it. The amount i, or my employer’s, has paid into insurance is far more than what those procedures have cost, even with the expensive services.
Any other doctor’s visits are insignificant compared to those costs, especially with co-pays
Just like any other insurance, they take in more than they pay out. Plus, they invest the money they take in, so it’s earning money itself.
It’s a protection racket. The insurers negotiate a cost with providers, hospitals, pharmaceutical companies, etc. That is NOT the cost you’d be charged if you’re uninsured. Say, for example, an emergency appendectomy after rupture for uninsured would be charged 100K, but the negotiated price is 30K. Plus, depending on the level of coverage you buy, you’d still be likely to have cover 20% co-insurance of that.
And, it’s an insurance company. They get plenty of money every month for healthy people who won’t need much of anything. That’s usually the majority of paying customers. The insurance company will take that money and invest it, earning interest.
EDIT: Americans who worked long enough get government run health care (Medicare) at 65. So the most expensive patients aren’t actually on private insurance. This minimizes risk to their bottom line.
My dearest friend, the health insurance companies here in the USA are not only not close to bankruptcy, they are so flush with cash that they can manipulate our congress through lobbying to further enrich themselves. It is an extremely lucrative business.
In the USA, insurance is a complicated topic on purpose, to make it harder for consumers to get proper information and advocate for themselves. For anything above routine procedures, insurance agencies will often arbitrarily deny patients care (even after multiple hospitals/doctors request treatment) just in the hope that the insured person will give up. This happens quite often, so now that person paying 450 a month for insurance just ‘gave’ the insurance that money because they can’t spent the 2-3 days arguing with an insurance rep to get their stuff covered.
American insurance companies have developed a very effective strategy of charging the maximum amount of fees while providing the minimum amount of care.
Which is how they’re not only profitable, but still have large budgets leftover for things like advertising and bribing/lobbying congressmen.
Insurance companies are VERY GOOD at doing what they do. They calculate “on average” how much the average customer is going to use in benefits, and then charge 20% more than that.
The two key things to remember: First, hospitals and doctors have to overinflate their prices so that when insurance companies say “we’re only gonna pay 60% of that”, they can still charge what they’re supposed to charge. That’s part of the reason our healthcare costs are absurd. Second, “coverage” isn’t comprehensive. Even with insurance premiums paid, we still pay for visits, tests, drugs, and procedures. Until we hit our “out of pocket maximum”, we pay 40-80% of the cost depending on the service/product. They only start paying most of the cost if we have already paid like $6000 this year. And that’s IF they decide to cover a procedure. The doctor doesn’t get to decide if it’s necessary enough for insurance to cover it. The insurance company does.
Now, keep this in mind. Health insurance can basically charge up to 20% extra beyond the healthcare benefits they provide. For decades, they have been working to make the whole healthcare industry as large and expensive as possible so that that 20% is as large as possible.
Insurance is like gambling, but with statistics and actuaries. Just as a casino knows the odds or sets the odds of having a large payout, insurers know what the likelihood of payouts are. They are the house and the house always wins.
They set premiums high enough to cover these eventualities. They spread the risk across a much larger pool. In the United States, only the very foolish and very poor can get by without having health insurance because charges for a medical catastrophe in one’s life would be a financial death even if one survived the medical difficulty. So many people carry insurance they may never use.
Secondly, the insurers have set deductibles. For most people in most situations, they will not have a catastrophic or chronic medical issue emerge. For example, I have a deductible of $8,000. Anything below this, I must pay. However, if in one year I were to have some medical problem where I’d be billed more than $8,000, say I got in a car accident, then I would pay the first $8,000 and only then would my insurer be responsible for any charges.
Finally, insurers negotiate how much they will pay. Many insurers only pay for care that is delivered within providers and hospitals who have agreed to certain rates. If those facilities wish to continue to see the insureds of the insurance company, they have to negotiate all their bills with the insurance company.
These are the three tactics that insurance companies use. They charge more premium than they are liable to pay out, they spread risk among a much larger group than is liable to become catastrophically sick, and they badger and force providers to take lower prices than those providers would otherwise require..
Eta: just for reference, I pay about $400 a month for insurance that I hardly ever use. All of my doctor visits in the past few years I have paid for more or less out of pocket. They were less than the $8,000 deductible that my insurance carries. So for me, and so many other people like me, the $3,600 or so I paid out in premiums are completely profit to the insurance company.
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