I don't understand this claim. Doesn't every business have costs to make its goods and services, and revenue when those are sold? A grocery store sells food and uses the money to buy more food, pay its employees, reinvest etc, and the profit leftover goes to the owners. An insurance company sells policies and similarly uses the money to pay claims, pay employees, reinvest, and profit. Why is the insurance company's sales revenue pass-through and the grocery store's sales revenue not?
Update (30 minutes in): the replies so far all seem very superficial. Yes, I know that insurance is not exactly the same as grocery stores. This does not explain why they should suddenly be treated differently from an accounting perspective despite what everyone else before this moment has done.
The thinking here is that because UHG is legally obligated to pay out claims, this money only "passes through" their hands. I believe the legal obligation is the thing here.
Anyway, if these pass through costs (the claims they are legally obligated to pay) are removed from the equation then their revenue number is smaller and their profit margin is larger.
Lots of businesses and industries have legal obligations to pay money for various things at various times, they don't treat that as pass through...it's revenue and expenses. Money is fungible.
In health insurance specifically, profitability is somewhat regulated and this gets at the accounting issue here. Insurance companies should maintain a medical loss ratio of 80-85% meaning that fraction of the premiums should be paid to providers. The remaining 15-20% is split between administrative costs and profit. Most of the article's forensic arguments around this are weak and circular and represent a misunderstanding of the accounting itself.
Insurance money goes from the insured, into the insurance company's bank account, and IF the insured customers need services, it's then paid to service providers. If not, it sits in the insurance company's bank account as profit
Considering insurance premiums that are later paid as insurance claims as not being revenue is absolutely bonkers and there's a reason that's now how the accounting actually works
“This measure, while a standard accounting metric, obscures the strong financial performance of financial intermediaries such as health insurance companies, whose revenues are mostly pass-through payments between insured individuals and their health service providers. […]”
It seems to me that this document is almost entirely an argument for changing the accounting rules because of this distortion.
If they are, then what do we call it when my medical expenses surpass my premiums? Negative passthrough? Contra passthrough?
What do we call it when I pay premiums for a year, never use a dime of it, and then cancel my insurance? I don't get that money back, nor does it get passed through to medical providers.
Do life insurance companies consider my premiums to be a passthrough to my eventual benefit payment or do they count them as revenue?
To illustrate the problem with this, what would you calculate their revenue to be if you become severely ill and they pay out $100,000?
There is no such concept in accounting as negative gross revenue. And situations where net revenue goes negative are exceedingly rare and complex (you’d probably hear about it in the news and someone might end up in jail).
The "Insurance Style" View (If they copied UHG's model): If an investment fund counts your $1000 deposit as their own revenue and treats buying stocks for you as their own cost, they made $50 on $1150 of sales and have a 4.3% profit margin.
The distinction is that the insurance company is not selling you medical services; those are covered by your and other clients' own money. They are selling the service of managing a central fund to reduce risk for the people who are part of it. For them to claim that you were paying them for medical services, they shouldn't just be covering the hospital bills—they should be operating the hospital and buying and selling the drugs themselves. It might feel like they do that, but this is actually done by the healthcare providers and pharmacies, with the costs merely covered by the insurance fund.
Grocery-Bagging Analogy: Imagine you pay a teenager $10 an hour to help bag customers' groceries. In that hour, $2000 worth of groceries get bagged, and your business takes a $100 fee from the store for the service. After paying the teenager, you pocket $90.Do you claim a 90% profit margin on your $100 service fee? Or do you claim that your "costs" were $2010 because you included the value of the customers' groceries, pretending your margin was a measly 4.3% while walking away with almost all the fee?
Based on the source I, personally, don’t find it to be a credible argument
>Based on the source I, personally, don’t find it to be a credible argument
Agreed. This just has "if we redefine [commonly used term], then we get a more shocking/favorable number for our cause" vibes. You see this in government statistics as well, eg. "the official unemployment rate might be 4% (or whatever), but if you factor in people who are discouraged and people who are underemployed (whatever that means), it's actually 15%!" or "the official poverty rate might be 10%, but if you redefine 'poverty' to mean 'not being able to raise a family of 4 on a single income', the actual poverty rate is 40%!"
We have a set of accounting rules that apply to firms who are middlemen with clearly distinct transactions with both their suppliers and customers. We have another set of accounting rules that apply to firms who act as a third party agent in a transaction.
Whenever you have such a classification, you are always going to have a gray area in between, firms where a judgement has to be made on which set of rules to apply.
Your unemployment example is great: we have 6 different definitions of unemployment, U1 through U6. Different ones should be used in different situations. And there are grey areas between the classifications -- are you a "discouraged worker" (u4) or "marginally attached worker" (u5)?
Which is fine. It's okay to argue to have debates over whether we should be paying attention to U3 unemployment vs U4 or U5. What's not okay is to silently swap out the definitions just so you can get an attention grabbing title. It's bad if you're saying "the unemployment rate is actually 3x higher than what the government claims!", just as it's bad to put out a study saying "UnitedHealth's profit margins four times what it claimed"
This is true of life insurance, investment firms, and banks. It's also true of marketplaces that connect buyers and sellers, like Etsy.
Groceries stores are buying from suppliers and selling to consumers, but those are separate operations. If the consumers opt out, the grocery stores (temporarily) still have a full and complete obligation to their suppliers. It's hard to sell to customers without supply, but if you try hard, you could theoretically do that as well.
Somebody with a better financial background might be able to define the nuances of accounting practices here, but there's already a pretty meaningful line that's established. It is kind of weird that health insurance doesn't behave like a financial product.
Fundamentally every insurance company is governed by 3 ratios, loss ratio (what percentage of premium is paid to make the buyer of the insurance whole), expense ratio (cost of doing business, paying staff, keeping office lights on, paying vendors) and combined ratio (both of these combined). These are true for any insurance company which writes premium using their own capital, whether its health insurance, life insurance, property insurance, SMB insurance.
The thing this article is missing here is that the "pass through" costs are costs incurred by UHG directly, they are the ones paying the bills. How is this pass through, it's not being passed to the consumer, the only thing I pay is my deductible and retention which is at most a couple of thousand dollars, these are true costs borne by UHG. So in practice if I pay 100 bucks every paycheck, UHG is taking in 2600 bucks worth of premium, using average industry loss ratios which are say 60%, UHG is paying directly 1,560 bucks to care providers for my own care. I'm not paying that, what I pay is a deductible which is treated entirely separately.
I am the biggest insurance skeptic in the world because I think the business model is awful, a business's return on capital averages at 5-10% a year which is truly an awful return for how much capital is required. Insurance companies will make between 0 and 10% of underwriting profit a year (the pure profit from insurance premium minus total expenses) and they usually operate a very large investment vehicle invested typically 70% into bonds/gilts. That being said, this doctor's view of how insurance accounting works by comparing it to a biopharma or a trading brokerage firm is immensely disingenuous.
Suppose you run a brokerage or some kind of marketplace enabling transactions. Should all transactions passing through your platform be considered your revenue? Or only the part that stays with you for the services you provide, while deducting the component which is simultaneously directed to the transaction counterparty?
In one simple perspective, calling these revenue and inventory would make sense only in a world where you hold on to the cash and the goods for extended periods, so they need to be appropriately accounted for in your books among cash flows and balances.
So what should be the correct accounting model for an insurance service that collects premiums and holds on to your money and pays later for services once you avail them?
I imagine that so long as they are taking on the risk of how much service you might avail rather than simply putting a stop at how much you've paid them in advance, then the premiums they collect ought to be considered revenue, to balance against the as yet unknown inventory costs.
You're just asserting common convention among some implicitly selected audience that you consider "most" people, rather than justifying why that is the most reasonable practice.
Not that I consider it unreasonable (as I explained above).
Most people (in the populace) are unfortunately not numerate enough to have a thoughtful opinion on how it ought to be accounted, and are irrelevant to this discussion.
The purpose of language is communication, so if "most" people (which I mean to be laypeople off the street, which is the presumptive audience for this report) understand what it means, then it's mission accomplished. On the flip side, if the language used is deceptive/misleading, even if the underlying principle is sound, that's bad. The "most reasonable practice" question is unhelpful because it quickly devolves into questions on how society ought to work, which is subjective and no objective statements can be made about it. For instance, why even argue what the "profit" margin is? Should private entities even be making money on healthcare? Why not put out a "study" on how much unitedhealth is "stealing" from people instead? After all, the position that for profit companies shouldn't be involved in the provision of healthcare isn't exactly an uncommon position.
So it goes something like this
United Health Group -> United Health Insurance United Health Group -> Sunshine Hospital.
United Health Insurance has a profit cap, it’s a % of revenue. Sunshine Hospital has no cap. So Sunshine Hospital charged United Health Insurance X$ and that profit rolls up to United Health Group.
That doesn't really work as a strategy unless UHI cornered the insurance market within a given region, otherwise they'd lose business to competing hospitals. You might then say "hospitals aren't competitive, they're (regional) monopolies!", which might be true, but if that were the case, you'd expect them to raise prices anyways. They're profit maximizing companies after all, not operating out of altruism.
It's actually far more insidious.
The payer will have non-owned providers on their network, and by virtue of processing those claims they will understand a lot about the provider. They use this info to decide which providers to acquire. If the provider declines acquisition, the payer will use their member population (i.e. customers/patients of the provider who are covered by the payer) as leverage in negotiations against the provider, effectively crippling their business.
Once a practice is sufficiently maimed, they come back with another acquisition offer, and ta-da, the big player gets bigger.
Yes, all of this only works if the payer is large relative to other payers. There was a period of history where this was a caveat, now it's just an observation about history. Now, there is 1 or 2 mega-players in each region. They've divvied up the country into their own territories and will extract rent henceforth.
It's very important to understand that this model also eliminates all incentives to reduce costs of care. There is not a single player in the entire ecosystem who is incentivized to reduce cost of care except patients, but even there, most patients' health insurer is selected by their employer. Then what is an employer going to do? Select a health plan that doesn't have any local healthcare providers?
...which is specifically what I acknowledge in my original comment:
>... unless UHI cornered the insurance market within a given region, otherwise they'd lose business to competing hospitals.
For all the words you wrote, it doesn't seem like you're disputing this point, and you're not providing any evidence that UHI has monopoly/monopsony powers, only postulating that it's probably true.
And you're wanting someone else to go demonstrate to you that the single entity that is both 1) largest health insurer and 2) largest health provider in the country has significant market power?
I'll assume that this is legitimate ignorance and not a bad faith attempt to muddy conversation, and I'll direct you to a few resources where you can read several years of extensive investigative reporting on the myriad ways the pay-vider structure enables acquisition and exploitation of market power:
https://www.economicliberties.us/data-tools/unitedhealth-gro...
https://www.statnews.com/unitedhealth-group-investigation-he...
https://www.wsj.com/us-news/unitedhealth-medicare-fraud-inve...
https://www.wsj.com/health/healthcare/medicare-health-insura...
https://publicintegrity.org/topics/health/federal-programs/m...
You can also read the public filings of the payviders to read them bragging about their use of these techniques.
Here's direct reporting on the concentration itself: https://www.ama-assn.org/press-center/ama-press-releases/ama...
I read through the first 3 and can't tell how they're related, so I'm not going to check the rest.
>https://www.economicliberties.us/data-tools/unitedhealth-gro...
https://www.statnews.com/unitedhealth-group-investigation-he...
These only claims that united health is the "biggest", but that's not the same as having monopoly in a given market, which is needed for the scheme to work. Otherwise if you only have say, 30% market share, and your associated hospital charges sky high rates, you might be able to get slightly fatter margins on your insurance side, but you'll be losing money to other competitors that can out-compete you through greater economies of scale. I did a cursory search and their national market share in insurance is around 15%, which really seems tough to have the economics work out, especially given how capital intensive hospitals are.
>https://www.wsj.com/us-news/unitedhealth-medicare-fraud-inve...
What does "Medicare Fraud" have to do with the question that they're a monopoly or not?
This and the other links feels like trying to smuggle in a specific claim about what united health might be doing (ie. they're charging irrationally high prices just so they can pump their insurance margins), by pointing to a bunch of other shady stuff that they do.
You read through all those 8 parts and didn't see how, for example, Part 5, titled "UnitedHealth pays its own physician groups considerably more than others, driving up consumer costs and its profits" is related to the question of whether or not they have and exploit market concentration to increase their profits?
And yes I can see how the Medicare fraud could seem unrelated to someone who demonstrably lacks curiosity while feigning it. But it's actually just a special variant of the exact same strategy someone else described at the top of this thread.
UHG takes on Medicare Advantage patients. Medicare pays UHG depending on the delta between the amount of care those patients are expected to receive versus the amount they actually receive.
The payer is incentivized to make their patients look sicker and to deliver less care to them. Traditionally, the provider has no such incentive and the payer has few levers to encourage them to do either behavior, but in this vertically concentrated model, they are the same entity and now the payer has tons of levers to get specific coding and care practices out of their owned providers.
Exact same dynamic as described in the very first comment, but under a VBC rather than fee-for-service model, and Medicare pays the bill.
> I did a cursory search and their national market share in insurance is around 15%, which really seems tough to have the economics work out
Maybe cursory searches of national market share is not the best way to understand market dynamics in something as complex as the US healthcare system.
Welcome to the Certificate of Need. A legal requirement in most states for creating a new healthcare facility. Ostensibly to make sure that the population in that area has adequate healthcare options. But lobbied for by healthcare facility and hospital owners, it actually surveys other providers (your competitors) in the area and asks if their revenue would be adversely affected by you opening up. Too much of this (i.e. "we're worried that a hospital might reduce coverage or shutdown if there's too much risk to their profit"), and no CoN for you.
And this is to say nothing of Pharma Benefits Management. Steering you towards their own more expensive pharmacy (which isn't profit-capped). Mine does it by saying "you want a more convenient >30 day prescription? Only through our wholly owned mail-order subsidiary". 30 day scripts at your local pharmacy. 90 day for the same med? Denied.
1. Certain government contracts are what are called "cost plus" contracts. These have the same flaw. If the contractor earns 20% above "costs", they're incentivized for a cost blowout. Same with insurance premiums. If you have $100B in premiums, then $20B doesn't have to be spent on healthcare. But if premiums were $1T, then that same ratio is $200B. It incentivizes insurers to raise premiums; and
2. Health insurers cheat on the ratio by moving profits elsewhere. For example, UHC has a pharamaceutical benefits manager ("PBM"). Sounds inocuous but it's evil. PBMs bulk negotiate with drug suppliers but can basically keep the volume discount as an extra profit. PBMs do much more such as constantly force what medications are covered to force people to ssee providers even and get a prescription for whatever the new medication is even if they're stable on current medications. The whole point is to make people give up (or die).
But health insurance companies also own providers like hospitals and medical providers, either directly or through thinlyhh veiled subsidiaries meant to hide profits and that corporations are making healthcare decisions (something certain states have laws against).
The whole thing is a ridiculous system and needs to be scrapped.
[1]: https://www.cms.gov/marketplace/private-health-insurance/med...
Which of course means that these companies are not satisfied with a free ticket to arbitrary profit values, and have other motivations than just having all the money.
There's an aspect of "We also want to control things" to it.
I'm pretty sure that's why UHC gives people on ACA $100 gift card just for visiting their PCP. That inflates the 80% bucket.
That being said, while $UHG has had a good year, the stock is still underwater from where it's been since 2021, and no noticeable movement from this report.
If you have better ways to highlight human qualities in a text only medium, I'd love to hear it. The last 30 years of internet has shown we always had problems with such communication, let alone the last few years LLM generated responses
Perfect grammar and punctuation is par for any publication.
I know what gp is saying. They want to stay credible to the general public without also bearing the over-polished and verbose hallmark of LLM.
So you're choosing to punish well-written text?
But also, obviously, they’re being a gadfly for funsies.
the meaning is still easily parseable. i cant imagine letting something so superficial matter
It suggests a certain lack of diligence; like you didn't proofread your work. What about the person that should have proofread it as a second opinion? Did this really follow a rigorous academic process at all? <- That's the first impression when the presentation is sloppy.
1) medical loss ratio rules mean insurers are expected/required to pass a certain percent of premium on as payment for medical services, in a way that a grocery store is not required
2) insurer is selling you a contract that they will pay your medical bills if you have any - they are NOT retailing you medical services
3)
* https://ysph.yale.edu/news-article/universal-health-coverage...
Study:
I don't think there's much you can look at with the Affordable Care Act and think that it was a success.
Brokers quite correctly do not count the value of the shares because they never actually see it. But that's not the way insurance works--while dollars flow in and dollars flow out they are not remotely the same dollars. This feels like someone is trying to lie with statistics.
If you don't understand why are you commenting?
Your response makes absolutely no sense at all.