Improve profit margins

Left or right, we can all agree that our health insurance industry is in serious need of treatment, as we live in a time when a small number of companies make record profits while they cut costs by rejecting the claims of thousands of sick and desperate people.

The obvious question is: What can Americans do to get out of this seemingly self-perpetuating rut? The answer is anything but obvious and might surprise you. To illustrate it, you need look no further than your local beer aisle. Today we can go into any supermarket or liquor store and find dozens upon dozens of brands and styles of beers. Lagers and stouts, darks and lights, no matter what an American wants to pickle his liver, his local booze slinger is going to have a product for him.

Have you ever stopped to ask yourself why you have so many choices and how small microbrewers such as Dogfish Head and Brooklyn Brewery can successfully navigate the waters alongside massive companies such as MillerCoors and Anheuser-Busch InBev?

Insurers are usually not paying claims out of profit. Premiums are typically set based on expected claims + expected admin + target profit margin. Note I said “expected” claims and admin because these items are not known. Actuaries project these amounts based on past experience and expected changes between the experience period and the rating period. The actual claims will vary from the amount built into the premium rates. Sometimes they are higher, sometimes lower. When the claims are higher than expected over an inusrer’s entire book of business, losses occur. Then the insurers must pay claims out of the reserves they maintain. One important purpose of profits is maintaining the reserve levels. Another is capital investment. Many insurers are non-profit, but they still build a “profit” component into their rates, they just call it something like risk charge or contribution to reserves. The for-profit insurers typically have profit margins that are higher than the 3% cited in the article. 3% is more typical of a non-profit BCBS plan, but that can be misleading because they may be making 3% on group business, but losing a ton of money on things like individual and Medigap due to political pressure to keep these lines “affordable”.

The idea that the insurance companies make their profit solely on canceling policies is wrong. They do not cancel “thousands” of policies of sick people. This would lead to massive and unending lawsuits driven by lawyers who are constantly looking for just this sort of thing. They make their profits by getting paid by people who don't use the product as much as others do. They don't want to take on people who wait till they are sick before trying to find insurance.

Simplest solution - open up all states to all insurance companies, like auto insurance, and then require people to either buy insurance or post a bond allowing them to not have insurance. Every single insurance company would go into a price war with every other in trying to offer low rates to young healthy people.

They actually make their money via an explicit profit load (and also from investment income on their reserves). They build the average claim level into their rates, which means people who incur low claims (like you mention) offset those who incur high claims. The problem you alluded to is that if insurers are forced to cover anyone who wants insurance then people are more likely to wait until they are sick to buy insurance, which will raise the average claims cost and therefore raise premiums, making insurance less affordable.

Similarly, denying claims (where appropriate) keeps insurance more affordable. The biggest problem in health insurance is that the person “buying” health care services is for the most part not paying for it. Yes, they pay for the insurance, but when it comes time to “buy” health care services, they want the Cadillac regardless of cost because the insurance company is paying for it. No one thinks in the abstract that unnecessary utilization is going to raise premiums. This is where insurers can step in to control unnecessary utilization. Studies have shown that you can achieve lower utilization and higher quality. Most providers are paid on a fee-for-service basis, so the more services they provide, the more they make. So they have little incentive to control utilization, and in fact, the threat of medical malpractice claims encourages unnecessary utilization. This resulted in the insurer stepping in to “manage” the level of care as insurance became unaffordable. During the economic boom years, people rebelled against managed care restrictions, and as a result insurers backed off. But as premiums rose, pressure increased to find some new way to control cost. “Consumer driven healthcare” emerged, where the idea is that there is more member cost sharing so that the consumer (the patient) has more skin in the game, and therefore makes more prudent purchasing decisions.

I agree with your point that denying claims is not how they make their money. Claims are usually denied because they are for a service that is specifically excluded from the coverage the person purchased or because the service is not deemed to be medically necessary (which can be a judgment call, and the patient can appeal the decision). And besides, they build the average expected claims into their rates, which would reflect the degree to which claims are denied, so if they denied more claims, it would ultimately mean lower premiums, not necessarily higher profits.

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