Website design By BotEap.comQ: Do insurance companies benefit from late payments? A: Yes, they do. Payment delays are directly proportional to profit: the longer the delay, the greater the profit. In some cases, half of their profit margin originates from float, such as Aetna in 2006:
- Premium 7%
- Interest on Premium 7%
- Overall 14%
Website design By BotEap.comInsurance companies have often accused doctors of submitting incomplete and inaccurate claims, justifying the delays because of the time it takes to discover fraudulent claims. But some states found the plans guilty and penalized them for intentionally delaying payments to benefit from the “float.” For example, as early 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 review of basic insurance financial performance metrics helps to understand the above dynamics. An insurance company offers clients a premium based on the expected cost of caring for them, plus a premium for administrative costs and profit. Consequently, most analysts use three metrics to measure the financial performance of payers:
- Administrative Cost Ratio (ACR): The ACR is the ratio of selling and administrative 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 net investment income divided by premium and fee income.
Website design By BotEap.comFor example, Aetna showed the following performance in 2007:
- Premiums and fees $25.500 million
- MLR 72%
- RCA 21%
- Combined ratio 93%
- Implicit Operating Margin 7%
Website design By BotEap.comKeep in mind that other factors also influence profitability, especially legal fees. But an insurer can actually make a profit even if the cost of administration and insurance claims exceed the premiums it collects. She does this by investing the income from the free float in stocks and bonds between the time a client pays a premium and the time the client needs payment for her medical expenses. In the example above, adding MLR and ACR together, we see that without any investment, Aetna would earn a 7% profit on its premiums alone. However, Aetna takes advantage of the float and earns about 7% net interest income on premiums, bringing its total profit margin to about 14% (not taking into account taxes and other sources of income). References:
- Annual Financial Statements (wikinvest.com/stock/Aetna_(AET) September 24, 2008)
- Wayne J. Guglielmo, “Prompt Pay Laws Are Finally Gaining Force,” Medical Economics, January 22, 2001).
