Do Insaurance Companies Have An Incentive to Raise Medical Costs?

[Aargh]

As I understand it, insurance companies are required to spend 80% of the premiums they collect on coverage for clients. That means they get to keep 20% of any premiums they collect.

For an insurance company to increase their profits, it would seem they would need to raise the cost of medical coverage. If a medical procedure cost $1,000, an insurance company could charge their clients $1,250 and keep the $250 for administrative costs and profits.

If that same procedure cost $2,000, the insurance company could charge their clients $2,500 and keep $500 for administration and profits.


It would seem there is an incentive for insurance companies to maximize medical costs. Pass the cost increase on to their customers, keep a fixed percentage of the increased costs, and maximize profits.

[wufan]

I think you've over-simplified this. First, where does the "20%" come from? Insurance companies underwrite your risk to need health coverage. Let's say your risk adds up to $1000 in coverage this year, they will then charge an amount (I will assume that 20% is the max over risk), so they charge you $1200 per year. This extra cost covers the price of the underwriting, sales, advertising, administration, etc. Now the insurance companies take your money and invest it. If they did well, maybe they made 10%, so they grossed $1320 on the year. If you had a healthy year and only took one dr visit costing $120, then they made a profit of $1000 on your premium. Conversely, if you were in a car wreck, they might have to pay $20000 in care, and $4000 in admin costs, netting them a loss of about $22680.

Another issue is that perhaps the economy took a down turn, or they have idiots investing the money, and instead of making $120 on your premium, they actually lost $60 on the year. As long as you used less healthcare than estimated, they still made a sizable overall profit of $940. In the end, the healthy people support the sick people (25 healthy individuals to cover the one sick individual in my example).

So why not estimate that everyone will use $10000 in health costs, I think that's your question? Because no one will enroll in that program. Competition in the market keeps prices manageable. One of the ways insurance companies do this is by negotiating a lower cost with providers, actually decreasing the cost for insured individuals under their plan. Still, maybe there's collusion with companies, or a single payer system? When the estimated amount goes up 10 times, so too the cost of the sick patient increases 10 fold, and in practicality, this increases risk tremendously, and that's why we buy insurance; to decrease our risk of financial ruin.

All that said, underwriting higher medical expenses could turn up more money, but it also increases cost and risk.

[KC Shox]

America is a fat, lazy country. Junk food eating establishments everywhere you look and out of shape, overweight Americans are going to the hospital more often. Another problem, 7 years ago I sustained a vertebral artery dissection that required an ER visit and a week long stay in the hospital. I had a Cat Scan and MRI and due to the location of the injury, no surgical intervention could be done and the doctor's could only provide me blood thinners to insure I do not a have a stroke. One week in the ICU and the initial bill is 98,000 dollars. Again, after the initial scans, I was laid up in bed sleeping 20 hours out of the day while prescribed pain killers and given blood thinners. Nothing else and this was 98K? My health insurance company negotiated the final bill down to approximately 65K but that is why health insurance costs so damn much.

When you have more sick people going to the hospital and that hospital is charging exorbitant fees the amount of healthy people paying into the system is not covering the dollars paid out.

[shocka khan]

America is a fat, lazy country. Junk food eating establishments everywhere you look and out of shape, overweight Americans are going to the hospital more often.

My observations:
1. You are absolutely correct. That's why we have a diabetes epidemic in this country. But not only here. It seemed like every other person in Dubai had diabetes. It's even worse in India, which is ironic. India's main religion is Hindu, who are vegetarians, but since they're not eating meat, they substitute high carbohydrate foods, which means you have a bunch of fit-looking people running around with diabetes.

True story. I have a friend who is a very brittle diabetic. He had bariatric surgery (which my healthplan and indirectly my money paid for). He lost 50 pounds one year and then gained it all back the next year. He's about 73 now and retired. He has neuropathy, heart disease, problems with his eyes, all related to, you guessed it, diabetes. The most ironic thing about this is that he is about as conservative a republican that you'll ever find. He's really into personal responsibility, EXCEPT when it comes to him. I subsidized his bariatric surgery, but instead of taking the lease on life he was given, he went back to the food trough. Not much personal responsibility in that story is there?

2. Have you ever been to the Charlotte airport? Bojangles chicken kiosks as far as the eye can see. I don't know if there are a lot of fat flyers in Charlotte, but there ought to be, based on all the fried chicken joints at the airport.

My point here is that it's not just the insurance companies, hospitals and pharmaceutical companies screwing us, we screw ourselves by continuing to pursue unhealthy lifestyles even when we know they are not good for us. Even though I don't necessarily like the Cubans, their medical system focuses on people taking responsibility of their health conditions so that they can be better managed. And it works. Lucky for them it does, as their medicine is not exactly state-of-the-art, but at least they have proved if you manage people to healthy outcomes, you might not need all the technology.

We should all get out and exercise more. It's good for us and it keeps us relatively healthy (in many cases).

[im4wsu]

I think you've over-simplified this. First, where does the "20%" come from? Insurance companies underwrite your risk to need health coverage. Let's say your risk adds up to $1000 in coverage this year, they will then charge an amount (I will assume that 20% is the max over risk), so they charge you $1200 per year. This extra cost covers the price of the underwriting, sales, advertising, administration, etc. Now the insurance companies take your money and invest it. If they did well, maybe they made 10%, so they grossed $1320 on the year. If you had a healthy year and only took one dr visit costing $120, then they made a profit of $1000 on your premium. Conversely, if you were in a car wreck, they might have to pay $20000 in care, and $4000 in admin costs, netting them a loss of about $22680.

Another issue is that perhaps the economy took a down turn, or they have idiots investing the money, and instead of making $120 on your premium, they actually lost $60 on the year. As long as you used less healthcare than estimated, they still made a sizable overall profit of $940. In the end, the healthy people support the sick people (25 healthy individuals to cover the one sick individual in my example).

So why not estimate that everyone will use $10000 in health costs, I think that's your question? Because no one will enroll in that program. Competition in the market keeps prices manageable. One of the ways insurance companies do this is by negotiating a lower cost with providers, actually decreasing the cost for insured individuals under their plan. Still, maybe there's collusion with companies, or a single payer system? When the estimated amount goes up 10 times, so too the cost of the sick patient increases 10 fold, and in practicality, this increases risk tremendously, and that's why we buy insurance; to decrease our risk of financial ruin.

All that said, underwriting higher medical expenses could turn up more money, but it also increases cost and risk.

Wufan, your theory is right, but some details are way off. In health insurance, the money is not there for a year. Claims lag, the time between the medical service is provided and the provider is paid is traditionally three months, but is more realistically 1.5 to 2 months. So the insurer might have a balance of two months worth of premium to invest, cutting the $120 down to $20.

The other problem is that insurers do not actually set the cost of the procedures, but they do, in effect, limit the costs they are willing to pay providers. Providers agree to rate schedules and generally accept rates of payment much less than they bill. This is the "cost shifting" that occurs. When my mother had her final one-month stay in the hospital in 1988, BC/BS Medicare paid $12,500, she paid $500, and the remainder of whatever was billed, some $85,000, was written off by the providers. If the providers really required that $98,000 to provide care and maintain solvency, then those patients that had insurance other than Medicare or who had no insurance, have to pay not only the true cost of their care, but also make up for the shortage (written off amount) from my mother's case. The cost has been shifted from Medicare to "other" insurers/patients.

Take physicians charges for example. Say a physician charges $800 for an appendectomy. This is the amount he needs to pay for his time, his staff, his office, malpractice insurance, taxes, building rent, etc. If the insurers (or in Obamacare, the government) limits what he will get paid to $600, he will either have to cut back on the quality of staff, supplies, etc. and/or take a cut in his desired level of pay. Or make up for that $200 deficit from other sources. In effect, the insurer/Obamacare is saying to the doctor, this is the level of compensation that we think you deserve to have. As the gap between the ever-increasing $800 and the level or slowly increasing $600 widens, the provider will make less and less. Before long, the type of person who wishes to commit tons of time and education expense to become a physician will become more of what is now the middle to lower levels of the medical classes in school, the top one, in today's terms, will no longer be willing to make that investment for the diminished return. That is one reason why Obamacare will fail, it will diminish the skill level of the medical profession by drivging the elite physicians away.

The other reason it will fail under its own weight is that if 30 million were uninsured and the total healthcare cost of the other 270 million Americans is 300 billion a year, the cost of providing all 300 million will certainly not be less than the 3 billion, as was suggested when Obamacare promised every American the better benefits at lower costs. It has to cost more.

Most self-funded plans of insurance operate on a 7%-9% margin. That is, $0.91 to $0.93 of every dollar contributed to or earned by the plan is paid to providers for claims. This is very efficient, much more efficient than the government can ever do it. But Obamacare, as it is written, is eventually going to supplant these plans.

[wufan]

Wufan, your theory is right, but some details are way off. In health insurance, the money is not there for a year. Claims lag, the time between the medical service is provided and the provider is paid is traditionally three months, but is more realistically 1.5 to 2 months. So the insurer might have a balance of two months worth of premium to invest, cutting the $120 down to $20.

The other problem is that insurers do not actually set the cost of the procedures, but they do, in effect, limit the costs they are willing to pay providers. Providers agree to rate schedules and generally accept rates of payment much less than they bill. This is the "cost shifting" that occurs. When my mother had her final one-month stay in the hospital in 1988, BC/BS Medicare paid $12,500, she paid $500, and the remainder of whatever was billed, some $85,000, was written off by the providers. If the providers really required that $98,000 to provide care and maintain solvency, then those patients that had insurance other than Medicare or who had no insurance, have to pay not only the true cost of their care, but also make up for the shortage (written off amount) from my mother's case. The cost has been shifted from Medicare to "other" insurers/patients.

Take physicians charges for example. Say a physician charges $800 for an appendectomy. This is the amount he needs to pay for his time, his staff, his office, malpractice insurance, taxes, building rent, etc. If the insurers (or in Obamacare, the government) limits what he will get paid to $600, he will either have to cut back on the quality of staff, supplies, etc. and/or take a cut in his desired level of pay. Or make up for that $200 deficit from other sources. In effect, the insurer/Obamacare is saying to the doctor, this is the level of compensation that we think you deserve to have. As the gap between the ever-increasing $800 and the level or slowly increasing $600 widens, the provider will make less and less. Before long, the type of person who wishes to commit tons of time and education expense to become a physician will become more of what is now the middle to lower levels of the medical classes in school, the top one, in today's terms, will no longer be willing to make that investment for the diminished return. That is one reason why Obamacare will fail, it will diminish the skill level of the medical profession by drivging the elite physicians away.

The other reason it will fail under its own weight is that if 30 million were uninsured and the total healthcare cost of the other 270 million Americans is 300 billion a year, the cost of providing all 300 million will certainly not be less than the 3 billion, as was suggested when Obamacare promised every American the better benefits at lower costs. It has to cost more.

Most self-funded plans of insurance operate on a 7%-9% margin. That is, $0.91 to $0.93 of every dollar contributed to or earned by the plan is paid to providers for claims. This is very efficient, much more efficient than the government can ever do it. But Obamacare, as it is written, is eventually going to supplant these plans.

So, while I agree with what you said, I don't think it addresses the original question; do insurance companies want prices to go up? The answer to that is still no.

[im4wsu]

Insurance companies would want prices to be predictable, if not stable. Most insurers don't make much profit on health insurance, they just want tp breakeven and get some vigorish on cash flow. As I mentioned, the investment pool is just 1 to 1.5 months of premium and that pool remains relatively fixed until the policies terminate; in other words, it is not 1 to 1.5 months every policy year.

Whether a health insurance policy costs the consumer $1,000 per year or $50,000 per year really doesn't concern the insurer, as long as the price is competitive with other insurers.

[jazztrane]

The original question is an interesting thought-we renegotiated with our broker to a set fee several years ago, instead of the standard 4% because I wondered are you really trying to keep our rates down when you make more $ if they go up? As someone said its over-simplified but you could also argue are the insurance companies really fighting to keep costs down when their slice of a bigger total pie is more $ for them?