Q: Do insurance companies benefit from late payments? A: Yes, they do. Delays in payment are directly proportional to profit: the longer the delay, the higher the profit. In some cases, half of their profit margin comes from the float, such as Aetna in 2006:
- Premium 7%
- Interest on premium 7%
- Total 14%
Insurance companies have often accused doctors of submitting incomplete and inaccurate claims and justified the delays because of the time it took to discover fraudulent claims. But some states found guilty of and penalized plans for deliberately delaying payments to take advantage of the “float.” For example, as far back as 1999, United HealthCare paid Georgia $123,000, and Coventry HealthCare of Georgia (formerly Principal Health Care of Georgia) and Prudential HealthCare Plan of Georgia – nearly double that amount. A quick overview of basic insurance financial performance metrics helps to understand the above dynamics. An insurance company offers customers a premium based on expected healthcare costs, plus a surcharge for administrative costs and profit. Accordingly, most analysts use three metrics to measure payers’ financial performance:
- Administrative Expense Ratio (ACR): The ACR is the ratio of administrative and selling expenses to total premium income.
- Medical Loss Ratio (MLR): The MLR is the ratio of medical expenses to premium income.
- Investment Ratio (IR): The investment ratio is equal to the net investment income divided by the income from premiums and fees.
For example, Aetna showed the following achievements in 2007:
- Bonuses and benefits $25,500 million
- MLR 72%
- AKR 21%
- Combined ratio 93%
- Implied Operating Margin 7%
Keep in mind that other factors also affect profitability, especially legal fees. But an insurer can make a profit even if the costs of administration and insurance claims exceed the premiums it collects. It does this by investing income on the float in stocks and bonds between the time a client pays a premium and the time the client requires payment for his or her medical expenses. In the example above, adding MLR and ACR, we see that without any investment, Aetna would make a 7% profit on its premiums alone. Nevertheless, Aetna benefits from the float and earns about 7% net interest income on the premiums, bringing the total profit margin to about 14% (excluding taxes and other sources of income). References:
- Financial statements (wikinvest.com/stock/Aetna_(AET) 24 September 2008)
- Wayne J. Guglielmo, “Quick Pay Laws Finally Get Teeth,” Medical Economics, January 22, 2001).