A new article takes a fresh look at the cost-effectiveness of being self-insured and the variety of profit margins for different carriers.
The June 13, 2017 issue of the Journal of the American Medical Association (JAMA) published an article entitled, “Where Does the Health Insurance Premium Dollar Go?” that describes how insurance premium dollars are spent.
The article is written by Uwe Reinhardt –a world-renown healthcare economist, a professor at Princeton University and a frequent contributor to healthcare and health policy journals.
Reinhardt examines a report from America’s Health Insurance Plans (AHIP), the trade association for insurance carriers, that states that in 2014, premium dollars were spent in the following manner:
- 80% healthcare claims
- 18% operations
- 2% profit
However, it’s unclear whether these statistics are only for fully-insured employers and individuals, rather than the self-insured. Self-insured employers do not ‘pay’ premium dollars to insurance carriers, but pay a much lower administrative fee. For self-funded employers, the dollars to pay healthcare claims come directly from the employer, not the insurance carrier.
For example, a possible total premium for a single person at a fully-insured employer could be $8,000 per year. In contrast, the administrative fee paid to an insurance carrier for a single person at a self-funded employer could be only $600 per year. However, the employer pays for the employee medical claims, should they need healthcare.
According to Reinhardt, the profit statistic of 2 percent is an average across the industry, whereas individual insurance carriers report higher profit margins:
- Cigna 7%
- Aetna 4.7%
- UnitedHealthcare 4.6%
- Anthem 3.5%
The article also discusses how insurance carriers cite these ‘low’ profit margins to show that they are not overcharging. However, it points out that the operating costs of insurance carriers of 18 percent are about double the operating costs of insurers in other countries that have private health insurance.
What Does This Mean for Employee Benefits Professionals
- Being self-funded is potentially much more cost-effective for an employer than being fully-insured. This is not a new revelation. Employers and insurance brokers have known this fact for years.
- There are “level-funded” and self-funded products from major insurance carriers and third-party administrators that offer an alternative to being fully insured. At Compass, we have clients as small as 30 employees that are self-funded.
My children’s elementary school physical education coach tells her students every day, “Who is in control of you? YOU are!”
Likewise, being self-funded allows employers to:
- Control of their own health plan,
- Stop wasting money on fully-insured health plan overhead costs, such as operating expenses and taxes and
- Satisfies the ‘inner control-freak’ in all of us.
For more information on how your organization can benefit from partnering with Compass and gain new insights on your health insurance plans, contact us today.
Related blog post: