The amount of profit a health insurance company makes is not a cut and dried issue. There are many factors that contribute to a company’s profit or loss over a year. In the last 18 months most companies have averaged a 1.36% increase in their profits. These are record breaking profits for most companies.
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Not all health insurance companies saw profits. CNN Fortune 500 published the profits of 11 health insurance companies for 2011 as well as how they compared to their 2009 profits. Earnings ranged widely, from four billion by UnitedHealth Group to the 53 million lost by WellCare Health Plans.
Health insurance companies are in the business to make a profit in most cases. There are some nonprofit health insurance companies that use extra revenue to cover the cost of care for the uninsured population.
How do health insurance companies make a profit?
The largest source of revenue for a health insurance company would be the premiums they receive from policy holders such as yourself. These health insurance premiums are combined with interest earned on their “float”. This is money the health insurance company keeps on hand to pay claims. All of this revenue is used to pay claims throughout the year as well as pay for advertising, salaries, and expenses.
Now if you pay a company $3600 a year in premiums and only use $1200 in claims the company appears to make a profit of $1400. But what if they collect that $3600 and you used $25,000? Health insurance companies pool their premiums and the payouts on claims. This means the $1400 in profit from one policy holder is used to pay the $21,400 from another person.
This may seem unfair if you are paying more than you use but if you had an accident next year it would balance out in your favor. Insurance companies charge premiums based on your assessed risk but they cannot predict your future medical needs. The amount of revenue left after all of the year’s expenses and claims are paid is considered profit. Part of this profit is reinvested for the next year’s “float” account.
How will the Affordable Care Act impact health insurance company profits?
Many people understand how the Affordable Care Act is going to impact them, but what about private health insurance companies? They have already begun to feel the impact. The act provides a substantial number of changes to take place over a four year time period. Each change was set on a timeline with clear guidelines on how it will be implemented and if it will affect only new policies or existing policies also.
As of January 2012, health insurance companies are now required to spend at least 80% of premium dollars collected on actual medical expenses. This means they can only use 20% of this money for overhead and profit. Any company that does not fulfill this obligation will be required to send rebate checks to all of their policy holders to make up the difference under the new law.
Health insurance companies will also be required to cover more health insurance benefits as part of the basic care provision. This will include providing preventive care without a copay and being required to cover children regardless of their health and for a longer period of time.
Another provision that will impact health insurance companies goes into effect January 2014. They will no longer be able to have annual or lifetime caps on policies. This means that they cannot refuse to pay claims because you have gone over a certain amount in claims paid out already.
What happens if a health insurance company does not make a profit?
Health insurance companies are feeling a surge in profits for 2011 but what happens when a company does not? Companies of all kinds are failing and insurance companies are not immune to this. If a health insurance continues to have a negative profit margin they will not be able to stay in business.
Each state has a non-profit agency in place to handle the fall of an insurance company. Every company licensed to sell insurance in that state is required to be a member of the state’s Guaranty Association. This agency protects consumers from being stuck with unpaid claims.
Once the state courts deem that an insurance company is insolvent the state commissioner will notify policy holders and oversee the liquidation of company assets. These assets are used by the Guaranty Association to pay claims left by the company.
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