Health Insurer Profits

Health insurers are under fire for health care cost increases.   The vast bulk of their expenses are to health care providers, so it is the prices paid to those providers that should be of concern.  The provider market, as I have detailed many times, has become intensely concentrated and providers have used that market power to raise prices.  At the same time, the health plan market has also become very concentrated with insurers having some price power.  Insurers, however, have limits on their profitability at the federal and state level, with requirements that they spend a certain percent of premiums on health care services.  In general, these dueling oligopolies have settled into a pattern of charging and accepting high prices for health care services and just passing them on to employers and consumers.

Insurer costs and profits can vary by type of business.  Medicare Advantage, Medicaid, group insured, group self-insured and individual plans are the main lines.  Government is the primary payer for Medicare, Medicaid and many individual plans, through the ACA exchanges.  A Kaiser Family Foundation report discusses health insurers profit margins in 2024, looking at gross margins, which is a little misleading because it measures what is left after medical costs but before administrative costs and taxes, and at medical loss ratios.   (KFF Report)

Gross margins for Medicaid were lowest, at $608 per enrollee for the year; followed by fully-insured group business at $846, individual plans at $987 and Medicare Advantage a whopping $1655.  The medical loss ratio for individual plans was 85%, for fully insured groups was 88%, Medicare Advantage 90% and Medicaid 91%.  Be interesting to see how profitable administering self-funded employer plans is for health plans.  The large Medicare advantage gross margins reflect high payments by the government, and explain why there is such a movement to reduce those payments.  The high loss ratio for Medicare Advantage is also a reflection of high government payments–you can run a higher loss ratio when you are getting paid a lot more, since your administrative expenses are the same.  The low individual plan loss ratio, on the other hand, reflects the higher marketing costs related to that business.