It’s been sad to see people celebrating the murder of someone just because they work in Healthcare Insurance. It’s immoral to murder someone because you disagree with them.
But along with this celebratory sentiment, I’ve also seen a lot of people claiming that UnitedHealthcare is a uniquely bad actor that doesn’t pay out claims and if they were less greedy, we would have a much better healthcare system. Let’s look into that.
So how do health insurance companies make money? At a high level, it’s very simple.
A health insurance company’s customers pay monthly premiums into a pool managed by the insurance company. Then as some of those customers receive healthcare bills, the pool of money is used to pay those healthcare bills.
The Affordable Care Act requires health insurance companies to spend 80% of their premium revenue on medical care. UnitedHealthcare meets that and spends about 85% of their premium revenue on medical care.
The left of the chart shows the amount of insurance premium they receive for different business lines. Their largest revenue source comes from the US government which pays them for managing Medicare plans.
The different insurance premiums flow into Total Insurance Premium. This is the total amount of money that UnitedHealthcare receives and can use to pay for health services (claims).
On the right, you see that the vast majority (85%) is spent on Medical Care. Below that, there are administrative costs (customer support, IT, marketing, executive salaries). Then the Net Earnings are the amount reamining which is kind of like the Profit. The Net Earnings are deposited in the company’s treasury, used to buy back shares, or given back as a dividend to shareholders.
Personally, I think the US Healthcare system could be much, much better and I have had really frustrating experiences dealing with health insurance companies. But fundamentally, I don’t think health insurance companies can be better with their current incentives. People often switch health insurers after a couple years, so even if a health insurer figures out how to do better long preventative term care, their customers may switch to an insurer before the insurance company sees the benefit in their bottom line.
There are many different ways that we could make the healthcare system better. I’m in favor of increasing the doctor supply, improving telehealth, deregulating parts of the industry, and increasing competition. If you disagree with me on these specific solutions, that’s fine because there are many reasonable solutions!
Either way, the healthcare insurance companies are not in a position to make meaningful change, good or bad. They are relatively static businesses that take in money and pay out a fixed percentage of that money. And there is too much fixed cost for a new entry to dramatically change the model.
Healthcare is incredibly complex. But if we educate ourselves about how the system is built, we can be smarter about advocating for positive change.
Postscript: There’s evidence that the health insurance companies lobby the government to keep the current system in place and to keep health costs high. They will also resist regulatory change that will hurt their business, similar to how Turbotax advocates aginst simpler taxes. To me, these are just more reasons we need to understand and change the system.