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What is the way that Health Insurance Companies Make Money?

With the rising cost of healthcare an issue for many individuals, we take a look at the most frequently asked questions regarding how health insurance companies earn money.

There’s a lot to be confused about between consumers regarding the reason prices are rising. A key concern for many people is how insurance companies for health and the employees working with them earn profits?

We’ve listed answers to some frequently asked questions on health care costs.

What’s the different between being a captive agent who is employed by an insurance company and an independent broker or agent who is employed by you?

In accordance with the state or Insurance Company, Agent/Brokers (individuals or firms that assist customers in selecting health insurance) can get the insurance company with commissions. When someone purchases an insurance policy through an agent/broker, the insurance company that just received new customers will pay the broker an amount of commission. These commissions are included in policies and amount to the amount of money per month per policy. You’re unlikely to pay an agent or broker a specific cost in exchange for the services they provide. But, commission structures differ according to plan, insurer and the state. In several states insurance companies don’t pay the broker/agent commission for each policy.

Furthermore, the definitions and titles differ according to states. What could be referred to as an independent broker or agent for one State is known as consultant in another state, it is called a consultant.

How do insurance companies make money?

The insurance industry has two main source of income: the underwriting revenue and investment income.

Underwriting Income

Every person who has a health insurance policy is required to pay a monthly insurance cost. A health insurance provider puts the premiums that it receives from its customers in the form of a pool. If one of the clients requires coverage to cover medical expenses the insurer uses funds from the pool to cover it through an claim. Health insurance companies also utilize premiums to pay for expenses associated with running a business. Since the passage of the ACA law, it is now required for insurers to spend 80/85% on claims , and 20/15% on administrative expenses. This law governs how much income they can earn earned based on the cost of the premium. Other charges you incur for health care treatments (such such as copayments or coinsurance) are payable to your health service provider (doctors as well as hospitals) and not to the insurance company.

Underwriting Income = Premiums Collected – Claims Paid – Expenses

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Investor Income

Insurance companies collect the money that’s not spent on claims or expenses , and invest it. The profits from these investments (stocks bonds, stock real estate, bonds and so on.) is a source of income for the company.

Underwriting: What exactly is it? And what is it?

Underwriting is the term used to refer to the process of assessing the risk of covering and the costs associated with insurance. Prior to the passage under the Affordable Healthcare Act (“Obamacare”), complete medical underwriting required the thorough analysis of a person’s medical background. Health insurance companies invest a lot of time into analyzing and trying estimate the cost of claims. This included the monitoring of guidelines like eligibility and in-network and. out-of-network coverage and medical necessity authorization. Limiting or underwriting for existing conditions is not permitted in individual policies because of the ACA.

Direct profits from consumer premiums is contingent upon the amount of the insurance company uses. Premiums are gathered into the form of a pool. Money is then released from that pool as expenses and claims. Whatever is left is regarded as profit.

Are insurance firms able to earn any income or profit from Obamacare (also called”the Affordable Healthcare Act)?

Obamacare also known as the Affordable Healthcare Act set a number of restrictions on insurance companies. However, it also attempted to establish buffers to ensure that insurance companies would be protected in a market that has less certainty. The examples of both are outlined below.

Medical Loss Ratio

Obamacare (also known as Affordable Care Act mandates that small and private group plans allocate the majority of premium dollars in claims, and on efforts for improving the overall quality of healthcare. The remaining 20% of premiums can be used for expenses, and eventually to the bottom line . For larger group policies, Obamacare stipulates that 85 percent of premium dollars be used for claims.

Limited Restrictions for Coverage

Obamacare and Obamacare or the Affordable Care Act loosened the amount of restrictions insurers can put on coverage. This means that insurance companies cannot deny coverage or deny items covered in insurance policies due to existing medical conditions.

Maximum Out-of-Pocket

Obamacare (also known as Affordable Care Act enacted an expense limit for out-of-pocket costs which means that the customer is only liable for costs up to the amount of a specific dollar. After this, all benefits covered are insured by the insurance company.

Risk Corridor Program (2014 – 2016)

To ease the uncertainties of the new market, Obamacare or the Affordable Care Act contained a three-year Risk corridor plan. It meant that if an insurance company had paid less claims than the amount it was targeting the program would be able to contribute towards the plan. This money was then given to an insurance company which had made more money in claims than it intended to pay. Although this was a great concept, in the end it proved to be very difficult for insurers to assess their risk and claims in the changing market. It also was more difficult to make payments to insurance companies the amount they promised following a Republican-led Congress adopted a resolution in 2015 to change the program to “budget non-budget” (meaning the federal budget could not be used to prevent any mismatch in payments and out. payment in). 1

Why do insurance companies leave Obamacare as well as the Affordable Care Act?

In the past certain insurance companies believed that the financial loss incurred by participation to Obamacare as well as the Affordable Care Act were unsustainable. Alongside risk-based challenges, such as the Risk Corridor challenge, companies pointed to two causes of loss:

A Consumer Behavior of healthy individuals

Insurance pools ended up having an uneven mix with healthy low-cost customers as well as sicker, higher-cost customers. This led insurance companies to raise rates to earn profits. Simply put healthy people who believed they didn’t need insurance did not purchase insurance. To reduce the risk of this inequity, premiums had to rise. However, as the premiums increased there were fewer healthy individuals took part in Obamacare and this resulted in more expensive premiums, and in some instances it led to insurers’ decision to exit the exchanges.

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Choices made by States

States were offered two options:

  • The expansion of Medicaid to include more people, and/or
  • offer a state-based exchange or a federally-facilitated exchange.

Medicaid expansion was designed to aid consumers with low incomes who could not afford health insurance, but weren’t qualified for subsidy or tax credit. (Federal funds would initially cover 100 % of the cost of the new Medicaid patients and will gradually decrease to 90 percent by 2020 , and for the foreseeable future.). Prior to Obamacare as well as the ACA, Medicaid only covered children pregnant women, children as well as the elderly and the disabled. With the Obamacare’s Affordable Healthcare Act’s Medicaid Expansion there are more people eligible to be covered under Medicaid however, insurance companies would be protected from the cost.

Through exchanges that are based on state law, states create their own sets of prices, quality standards as well as health care services provided. Federally-facilitated exchanges use standard information and requirements regardless of state.

According to the data of data from the Kaiser Family Foundation, those states that established an exchange run by the state and also expanded Medicaid performed the most well when it came to the number of insurance companies that chose to join this year’s exchanges.2 Of the states that participated 75 percent of them included three or more insurance companies participating in exchanges. The states that decided to utilize exchanges that were not part of the Federal exchange, and also expanded Medicaid did worse (with 66 % of states having at least three insurance companies) and those who did not expand Medicaid were the worst (with only 55 percent of these states having at least three health insurance companies that participated on exchanges in the year).

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