In 2016, the health insurance industry reported $6 billion in profits during the second quarter, a 29 percent jump over the same period from a year before.  To most Americans that seems, well, greedy, since there is an ongoing debate about how to insure more Americans so that they can get the health care they need and protect themselves from the costs of a medical emergency.  However, the health insurers are not raking in profits like many other financial sectors or more lucrative industries; in fact, health insurance is only a moderately profitable industry compared to the rest of the American business world.

A 2010 study by Congressional Research Service found that health insurance companies earned on average, only 3.1 percent profit revenue.  That profit margin is significantly lower than pharmaceutical and medical device companies, but more than hospitals. Pharmaceutical companies average profit margins of 22 percent, and banks have profit margins that average 20 percent.   Although in recent years, insurers have begun posting large profits, primarily due to the economic recovery, from 2007 through 2009, eight of the ten largest insurers in the nation reported double digit losses.

It may seem hypocritical that insurers are decrying the state of the insurance markets, especially the Obamacare exchanges, while reaping enormous rewards, but that is because insurance profitability is closely tied to economic growth rather than particular government policies.  The truth is that most of the recent profits surge is due to investments paying off rather than an increase in policyholder enrollment.

The average annual health insurance premiums in 2016 was $10,345, which is considerably more than the average of $9,596 in 2012 and $7,700 in 2007.  By 2023, this figure is expected to reach $14,944. To the casual consumer, this might appear to be a cash grab by the insurance companies, but keep in mind that insurers operate in a very competitive environment, so they are trying to keep costs for consumers as low as possible.

The real culprit behind this steep climb in premiums is health care costs. In 2015, the nation spent more than $3.2 trillion on health care, or almost $9,990 for every American. While the actual cost of various medical services and products are rising, the driving force behind the surge in prices is growing demand in the U.S. population.  Chronic illnesses like diabetes and heart disease are spreading at an accelerated rate, and Americans are increasingly older and in more need of health care.

Although it would seem that the health problems of others shouldn’t influence your health insurance costs, the reality is that as more people seek out medical care, providers are able to raise prices without a real drop in demand.  Furthermore, you should know that many of these older and sicker Americans are in the same insurance risk pool that you are.  If they need more or pricier medical services, those costs are often transferred onto other policyholders in the form of higher premiums and out-of-pocket fees.

Government Regulations Limit Profitability

The Affordable Care Act (ACA) did much more than offer subsidized health plans for lower income families when it passed in 2010.  It also ushered in a new era of corporate responsibility by limiting how much profit insurance companies could reap. The ACA introduced profit restrictions in the form of medical loss ratio (MLR) rules.

Medical loss ratios are defined as the ratio of patient benefit to any losses including profits for insurers.  For example, if an insurer used 60 cents out of every dollar to pay off beneficiary claims, then its MLR is 60 percent. Under the Affordable Care Act, all insurance companies must maintain an MLR of 80 percent or higher, although there is some variability depending on the size of the insurance risk pool; some larger group plans must meet a MLR threshold of 85 percent.  That means that insurers can only use 20 percent of revenue for corporate salaries, marketing or shareholder dividends.

This law has effectively shut the door on excessive profiteering in the health insurance industry.  However, it has also spurred more consolidation within the industry. That is why major health insurers like Humana and Cigna pursued mergers with other insurers—although both of these blockbuster mergers were blocked by federal regulators.  Smaller insurers have successfully merged, however, thereby increasing the resulting organization’s market share and revenue.

The Bottom Line

Ultimately, the public wants someone to blame for the mounting costs of health care, and insurers are an easy target. Few consumers understand that health insurance is so tightly regulated, that professionals looking for lucrative salaries rarely choose this industry.  You may be unhappy that you have to pay more every year to insurers to keep your policy in force, but you should really direct your blame at health care providers that are ratcheting up their prices at such an unnatural pace.

If you are looking to save money on your monthly premiums, then you should shop around—and start by looking at the Obamacare exchanges.  If you make between 100 and 400 percent of the federal poverty line, then you probably qualify for federal tax credits that can reduce premiums on these health plans by hundreds of dollars a month.

If you make less than 138 percent of the federal poverty level, then you may be eligible for your state’s Medicaid program.  If you enroll in Medicaid, you and your family will enjoy a wide range of health benefits for only a minor monthly premium.

Whether you want an Obamacare subsidized health plan, a Medicare Advantage plan, or a supplemental policy to fill in the gaps on your existing coverage, one of the best places to start is with a trusted, independent insurance brokers.  One of the most reliable and well respected brokerages in the industry is Boost Health Insurance, so visit us today!