Introduction
Health insurance is a complex system that can be difficult to understand. How do health insurance companies make money? While it may seem like a simple question, the answer is anything but. In this article, we’ll explore the various ways health insurance companies make money, including premiums, co-payments and deductibles, reinsurance, investment income, government subsidies, administrative fees, and selling additional products and services.
Premiums
Premiums are payments made by policyholders to their health insurance companies. These payments are typically made on a monthly basis, and they cover the cost of providing health insurance coverage. According to a study by the Kaiser Family Foundation, the average annual premium for employer-sponsored family health coverage in 2019 was $20,576.
Health insurance companies use these premiums to cover the cost of providing medical care and other services to their members. They also use them to cover the costs of running their businesses, such as marketing and administrative expenses. Any remaining funds are used to generate profits for the company.
Co-payments and Deductibles
Co-payments and deductibles are two common types of cost sharing agreements between health insurance companies and their members. A co-payment is a fixed amount that a policyholder pays directly to a doctor or hospital at the time of service. Deductibles are amounts that a policyholder must pay out of pocket before their insurance company will start covering the cost of medical care.
Health insurance companies use co-payments and deductibles to reduce their risk and limit their financial liability. By requiring members to pay part of their medical bills up front, health insurance companies ensure that they won’t have to pay for all of the costs associated with providing medical care.
Reinsurance
Reinsurance is an insurance policy purchased by an insurance company from another insurer. The purpose of reinsurance is to protect the original insurer from losses due to large claims. For example, if an insured person has a medical emergency that requires an expensive treatment, the original insurer can purchase a reinsurance policy to help cover the cost of the treatment.
Health insurance companies use reinsurance to spread out their risk and protect themselves from the financial effects of large claims. By purchasing reinsurance policies, health insurance companies can reduce their potential losses and increase their profits.
Investment Income
Investment income is money earned from investments made by insurance companies. This income can come from stocks, bonds, mutual funds, real estate, and other investments. Health insurance companies use investment income to supplement their profits from premiums and other sources.
In 2017, the top 20 U.S. health insurers reported a combined total of $21.4 billion in investment income, according to a report from the National Association of Insurance Commissioners. This income accounted for 11.9% of their total revenue.
Government Subsidies
Government subsidies are funds provided by the federal government to help lower the cost of health insurance coverage. These subsidies are available to individuals and families who meet certain income requirements. The subsidies are paid directly to health insurance companies to help reduce the cost of premiums for eligible policyholders.
Health insurance companies use government subsidies to reduce their costs and increase their profits. According to a report from the Centers for Medicare & Medicaid Services, the federal government spent $15.6 billion on health insurance subsidies in 2017.
Administrative Fees
Administrative fees are charges that health insurance companies collect from healthcare providers for processing claims. These fees are typically charged in addition to the cost of medical care. Health insurance companies use these fees to cover the costs of processing claims and other administrative tasks.
According to a report from the American Medical Association, health insurance companies collected nearly $10 billion in administrative fees from healthcare providers in 2016.
Selling Additional Products and Services
Health insurance companies also make money by selling additional products and services. These products and services can include vision and dental plans, long-term care insurance, disability insurance, and supplemental health insurance. Health insurance companies use these products and services to generate additional revenue and increase their profits.
A study by the Kaiser Family Foundation found that, in 2018, the top five U.S. health insurers generated a combined total of $26.7 billion in revenue from additional products and services.
Conclusion
Health insurance companies make money in a variety of ways, including premiums, co-payments and deductibles, reinsurance, investment income, government subsidies, administrative fees, and selling additional products and services. By understanding how health insurance companies make money, consumers can make more informed decisions when selecting a health insurance plan.
It’s important to remember that health insurance companies are businesses, and their primary goal is to make a profit. As such, it’s important to be aware of the different ways health insurance companies make money so you can make sure you’re getting the best deal possible.
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