Should Health Insurance Be Sold for Profit?

Most Americans benefit from not-for-profit health insurance. Medicare and Medicaid or other government-run health plans currently cover more than one in four Americans. Eligibility is based upon attained age or need, not health status. Pre-existing conditions are never excluded, policies are never rescinded, premiums aren't adjusted based on age, no shareholder benefits from the sickness or accident of those covered, and no sales commissions are paid. 

Employer-sponsored health plans cover 59 percent of the population. Beneficiaries of the large, self-insured plans typically run by employers of 100 or more employees also operate like not-for-profit plans in most cases. Eligibility is based on employment, not health status, pre-existing condition exclusions are usually waived for employees who enroll when they are hired, policies are never rescinded, everyone in the group pays the same premium, no matter their age, and no sales commissions are paid. Self-funded employer health plans buy administrative services from a health insurance company or third party claims administrator, and these services typically represent between 12 and 15 percent of the cost of the health plan. Premiums are set at rates that are projected to cover actual claims costs and contribute something to reserves for unexpected costs. Any excess reserves are used to reduce future premium increases, not paid out to the employer's stockholders. Whatever profits are earned by the insurance carrier or third-party claims administrator that manages the plan come from the 12 to 15 percent of plan costs spent on administrative services and reinsurance premiums. No one profits from the 85 to 88 percent of costs that cover the sickness or injuries of beneficiaries.

For employers too small to self-insure, and for the nine percent of the population covered by individual health plans, things operate much differently. Underwriting of an employee's or individual's health status is used to determine whether or not coverage is offered. Pre-existing conditions are excluded from individual coverage for at least some period of time, policies are rescinded if an application omits information the carrier deems relevant, and premiums are adjusted based on age, making health insurance inexpensive for the young and healthy and very expensive for those over age 50. Sales commissions, often 10 percent of premium, are paid to the agent selling the health plan. The insurance carrier providing coverage hopes to earn a profit not only on the administrative service it provides, but on the illness covered in the plan by keeping the medical loss ratio of the plan (the amount paid out in claims) as low as possible. This is why administrative expenses in small group and individual health plans run 25 to 30 percent of premium, more than double the administrative load in self-funded plans, and six or seven times the administrative load of Medicare.

It is no surprise, then, that the uninsured are made up primarily of those who are not eligible for a government health insurance program like Medicare, Medicaid or CHAMPUS, or who don't work for a large employer. It is these individuals and small businesses that would be the most direct beneficiaries of health reform that provides the benefits of eligibility based on American citizenship, not health status, that prevents the imposition of pre-existing condition exclusions, and that requires at least 85 percent of premium go to pay claims, cutting almost in half the administrative load currently built into most individual and small-group plans. By providing affordable health coverage for those currently uninsured, the uncompensated care burden of physicians and hospitals across the nation will be reduced, allowing them to slow the rate of increase in their charges. This will benefit all of us who have insurance, whether provided by government, employer or purchased in the individual insurance market place.