How Do Insurance Companies Make Money – Nowadays, health insurance policies are in demand. Almost every elite, as well as middle-class families, also have insurance, especially health insurance. Health insurance is essential because you never know when you need instant money for your health and medical fee. A question arises in mind that if health insurance companies are going to pay for your medical services, how would they earn? Well, they do have a source of revenue.
One of the sources of understanding revenue generated by health insurance is understanding the concept of underwriting income. Underwriting Income is the difference between the premium charges imposed by the insurance company and claims that an insurance company has paid along with the total expenditure per person. An underwriting company is our indicator of how well the insurance company is working or the company’s risk of having a downfall or bankruptcy.
When you go to a health insurance company and acquire an insurance policy, the customer has to give premium payment to the insurance company. A premium is paid each month. It is the amount that you have to pay every month for your health care. It does not include the other charges. So the premium you give to the company each month is the revenue for that company.
Premiums are the charges you have to pay each month
For example, in easy words, premiums are the charges you have to pay each month even if you don’t need health facilities each month. It’s not like you will get into an accident or fall sick each month, but you still have to pay the premium charges every month. Unfortunately, if you fall ill after 2-3 months and file a claim, the specific insurance company will pay for your medical services and hospital charges. So underwriting income is that money that a company gained by having premiums from each customer each month, subtracting the expenditure and claims the insurance company gave to their clients.
If a health insurance company got $10million a year as the premium money and $6million spent in giving claims and expenses included, then the profit that the company attracted will be $4million.
Most health insurance companies are at risk if the claims are more than the premium money. It usually happens in the case of natural disasters. For example, if people hit ten families having the same health insurance policy in a landslide and the health insurance company will have to spend and return their claims collectively.
Are premium charges the same for everybody?
The premium charges that an insurance company imposes are different for different people. The premium charges depend on the type of policy you choose. Several approaches have different premiums, and that offer several services. A health insurance company doesn’t rely on only one policy; they make various health policies for other classes of people and people with health issues. The premium charges also depend on the type of health a person has.
Suppose a person has cancer, then, of course. In that case, that person will have to give a higher premium each month and have a different policy from the regular clients because cancer treatment would require a lot of expenditure, so a higher premium is imposed. Similarly, the charges vary for people having different kinds of diseases. A person having heart, kidney, or brain disease will have a higher premium. If you have serious health problems, then the bonus is increased and vice versa.
The premium charges also depend if you are severely alcoholic or have a habit of smoking, or have a problem with obesity. But how would a company know that a person has health issues? Well, before giving you the policy, the health insurance company will ask for your medical history. Also, the companies hire experts in statistics and probability. These experts will tell the risk factors to the company. They compile and analyze all the data to ensure that a company’s policy does not have a high rate of downfall and has low risks.
The company policymakers will decide what policies offer to the people who have cancer or some other serious health problems. These experts will do various calculations and compile the data in tables to determine the risk factors and what premium a person of specific condition to be charged with.
The investment income is a second source of profit for healthcare insurance companies. The cycle started when these companies earned the profit from underwriting income in the form of premium money. The complete then use the premium money to invest in some other things: shares, bonds, medical equipment, businesses, new drugs, new research, etc. Health insurance companies even have medical centers, hospitals, and private clinics.
All of such investments bring good revenue to the health insurance companies. Thus the revenue generated from these investments is called investment income. Investment income is a secondary source of money for health care insurance companies. In some cases, companies don’t have enough revenue in the form of premium money, and then the investment income becomes a primary source of revenue. When the health insurance companies don’t have premium money as a profit, they can go bankrupt. But the investment income balances out the equation. If health insurance only relied on premium charges, there would be very few companies in benefit.
Underwriting Income vs. Investment Income:
The above discussions are very clear about the types and sources of money the health insurance companies have. Underwriting income comes from the premiums that a company receives from every client each month. In contrast, investment income results from investments that a company made by investing the money generated by premium money. Underwriting income comes with a lot of risks, whereas investment income is the source of huge profits.
However, the start of the cycle of investment income must have a profit in premium money. If a company is generating enough revenue through premiums, then there is no need for investments. But as mentioned above, only relying on underwriting income is a considerable risk, so every insurance company must invest in some shares and bonds. The health insurance companies invest in medical centers, hospitals, clinics, drugs, research, claims, and adhesives.
Issues primary policies to less than 40 million:
Health insurance companies in the United States of America issue primary policies to less than 40 million of the total population to benefit from the guidelines. It means out of more than 320 million population, only 40 million has a primary insurance policy. The others have a direct policy plus a secondary policy, so they have to pay a premium for both approaches. Primary policy means that you got insurance as an employee or a member of a family. At the same time, secondary insurance covers some extra health care services and the primary policy.
Having two insurance policies will help you have health coverage, but it is also a benefit for the insurance companies. When we have two insurance policies for each client, it will bring two premiums each month. That is how insurance companies will make a profit out of bonuses. Health insurance companies give fewer primary policies and more secondary plus primary policies to the clients. It generates revenues. Also, remember that one cannot have a secondary policy unless they have a primary procedure. You can have a direct approach alone, but it is preferred that you have an immediate policy for secondary.
Health insurance companies collaborate with pharmaceutical companies to sell drugs to their customers. This collaboration is fruitful for the medical insurers. It is an opportunity for the insurance company to generate revenue and improve healthcare services. In this way, pharmaceutical companies can distribute their medicines to a broader range of audience. Pharmaceutical companies also launch various medical campaigns to help create awareness. This cooperation with health insurance companies allows the pharmaceutical companies to create awareness among the audience and support the insurance companies to generate revenue. Along with distributing drugs, health insurance companies also provide data to the drug Manufacturing companies to produce better drugs.
Medical Centers and Hospitals:
Health insurance companies have medical centers. These are small hospitals. These medical centers and providing health insurance consultation also provide other healthcare services such as regular checkups, dental checkups; some even offer psychiatric treatment, etc. Health insurance companies invest in such medical centers, people get treatment from medical centers, and the revenue generated is for the health companies. The same strategy goes for hospitals. Medical insurance companies invest in hospitals which bring money to them. Some health insurance companies own full hospitals and medical centers, whereas some companies invest in them by buying some shares. Overall profits are made for health insurance companies.
So, the trend of private clinics is widespread in the United States of America. Private clinics of general physicians, dermatologists, cardiologists, oncology, gynecology, pediatric rehabilitation, psychiatric, nephrology, etc., are common. Some health care insurance companies own even pharmacies. Private clinics bring a significant profit to such companies. One of the sources of money is the private clinic. Investments in private clinics have been profitable for the companies. When premium payments are not enough for the company, these investments bring many profits for the company. Investments like having private clinics or even having shares are made by the premium earned as the underwriting income.
Harmful ways to earn money:
These insurance companies do not come clean and indulge in negative ways to earn money. They manipulate your mind into some policies which are beneficial for them.
One of the ways to earn money is adverse selection. The government pays the insurance company Medicare of each person. So what insurance companies do is give policies to only healthy people and do not have severe health problems, such as cancer, organ damage, etc. They do not have that many expenses on their health care.
Suppose that an insurance company signed up for 50 healthy people, the government is supposed to provide Medicare to each one of them. The health insurance companies will get paid more while settling for less. The money of Medicare is increasing, but the money that a company will spend is very little. So they make money by adverse selection. They are choosing only those people who do not have that much of a health problem. In this way, the company will get the premiums, the money on Medicare or each client by the government and will not have to do much work leading them to make more money while doing less.
Provide fewer health care services:
Some health care insurance companies earn through this negative way. The advertising they show and the policy they offer have many medical services and benefits that will lure people’s minds. But in reality, these companies would not fulfill their promise of not providing the help they mentioned in the policy. They would continue to take premiums each month, but they won’t or will provide minimal service when it comes to doing the expenditure.
Well, this is not the case for every company. Some companies provide the best service they showed in advertisements, but some companies do not follow them. They will take money from you in total but will provide less benefit than they mentioned in the promotions and the policy. The premiums collected are way higher than the expenditure, and the profit is also doubled. For example, the tips contained are $40billion, and the spending is way less than $10billion, then the company’s profit is $30 billion.
Payless for the services:
Healthcare insurance companies provide discounts, and people get policies. But these companies would pay less for your medical treatment than the actual price mentioned in the list of hospitals. For example, if a bandage treatment costs $10 in a hospital ABC, the insurance company will negotiate with them to lower the prices. The insurance company will end up paying less than the actual cost. How will this help the hospitals and the company?
Healthcare insurance will negotiate with the hospitals and send their clients who are patients to that specific hospital. That hospital will have more patients and provide treatment on fewer charges than the actual price. These deals And collaborations are not known to the client. In reality, due to this collaboration, healthcare companies don’t have to pay that much, they can earn a profit, and the hospitals will have more patients.
Manipulate people mind into bad choices:
Insurance companies often manipulate their clients into choosing something that is not good for the clients but is beneficial for the company. Insurance companies have massive networks and also participate in drug distribution. The people choose those medicines, hospitals, or clinics that have collaborated with the insurance company and are a part of this network. These discount network drug distribution are all a part of this manipulation. They manipulate your mind by making the whole process so complicated and difficult to understand. It is the human psyche that they don’t want to understand the complex processes. They will follow what the company will trick their mind into. This manipulation will lead to bad choices of clients and more beneficial profits for the companies.
Don’t return the claims:
Some insurance companies are also known for not returning the claims. If you got into an accident, you would file a claim. But some bad or low companies will not respond to the lawsuit. In the end, you will end up paying your medical bills, and the company will save money by not giving you the claim.
The primary sources of health insurance companies to earn money are the underwriting income and the investment income. These companies charge a premium from each of their clients every month. The profit generated from dividends is used to make investments in some shares, hospitals, bonds, drug distribution, etc. This investment brings a lot of profits and is a source of income for health insurance companies.