> Conventional accounting measures portray large health insurers such as UnitedHealth Group (UHG) as earning relatively low profit margins because they treat premium dollars that are subsequently paid out in medical claims as revenue. However, these medical claims are pass-through costs, not income retained by the insurer.
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.
I believe they are saying that only the portion of premiums paid by UHG customers _that are not_ spent on paying out claims should be counted as UHG revenue. That is if I and my employer pay UHG $18,000 over the course of the year and UHG pays out $2,500 to my doctors and to cover my prescriptions, only the remaining $15,500 should be counted as UHG revenue.
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.
Not sure I'm buying it tbh. I'm no fan of the American healthcare system, but we don't need to invent new accounting to make it look worse than it is.
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.
Yes. Each industry has developed accounting standards that reflect the nature of their business. You couldn't run a bank or a payments company with a simple sales - COGS = gross profit model, it just wouldn't make sense.
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.
Should gas stations exclude the cost of the gas they're selling as revenue? There's probably a better argument to be made that they should be included than insurance companies be excluded. Unlike insurance companies, where the costs could come in randomly and over the span of months/years, the gasoline they're selling must be replaced (no randomness element) and is turned over in a matter of days. And if you think gasoline should be exempt because "it's not money", should precious metal or crypto traders get off the hook because those aren't money either?
No - this is a false equivalence. Transaction processing companies for the most part handle the in-and-out flows as a single transaction. Insurance companies hold on to the premium pool ("float") for long enough that they have time to realize gains from investing portions of it - the inflow and outflow are very separate.
That's not a good analogy. Stripe and Visa don't deposit the money in their account and hold on to it, it literally goes directly from the payer to the payee, they just facilitate the technical movement
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
No, they're collecting money specifically on behalf of a 3rd party and then giving it directly to that 3rd party. They are custodians of that money only, it never even hits their bank account (goes into a dedicated trust account before distribution), and they cannot legally keep it. THAT is an actual passthrough.
This is addressed in the first paragraph of the pdf, with comparisons drawn to other industries and financial instruments where such income is not considered revenue. One can of course disagree whether it should be accounted this way, but the concept is not outlandish.
“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.
Seems to me that the argument is really "are my premiums a passthrough to medical providers" and I have a really hard time answering Yes to that.
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?
> if I…pay UHG $18,000 and… UHG pays out $2,500…, only the remaining $15,500 should be counted as UHG 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 Traditional View (How it actually works):
If an investment fund manages $1000 of your money and charges a $150 management fee while keeping your $1000 completely separate, they made $50 on $150 of sales and have a 33.3% profit margin.
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?
I just scanned the doc but I think your question is the core argument of the doc. It explicitly says that United is using standard accounting practices and proposes the “pass through” mechanism as a “better” metric.
Based on the source I, personally, don’t find it to be a credible argument
> It explicitly says that United is using standard accounting practices and proposes the “pass through” mechanism as a “better” metric.
>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)?
>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.
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"
An intuitive explanation is that financial products are, approximately, buying and selling as part of the same transaction. You can't separate the "selling premiums" part from the "paying out claims" part.
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.
This is contrary to GAAP and operationally false. An insurer takes on the risks including the health of the insured pool and cost changes during the covered period. An insurance BROKER or AGENCY only books commissions as revenue, but an INSURER books premium as revenue. Similarly a stock BROKER or AGENT is only acting as an agent and isn’t a party to the actual transaction they execute. Similarly for platforms, auctioneers, or other agents.
I work for an insurance company so can shed some light here as this article is written by someone that clearly doesn't understand how the business model works.
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.
I'm not an accountant and don't claim to have a clean answer to how it should be accounted, but I hope I can highlight the conundrum.
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.
All of this might be relevant in a conversation between accountants or investment analysts, but it's pretty obvious the "study" chose this particular methodology to get a number that makes insurance companies look as bad as possible. In this context, using their methodology does more to obfuscate/mislead than to clarify. If you say that UHI has a profit margin of 15%, most people would interpret that to mean that per $1000 worth of premiums paid, they make $150, which is exactly what happens. Their argument of "they charge $1000 in premiums, but of that $800 is paid out as costs, therefore their margin is 75%" is more confusing.
You're just asserting common convention among some implicitly selected audience that you consider "most" people, rather than justifying why that is the most reasonable practice.
Not that I consider it unreasonable (as I explained above).
Most people (in the populace) are unfortunately not numerate enough to have a thoughtful opinion on how it ought to be accounted, and are irrelevant to this discussion.
>You're just asserting common convention among some implicitly selected audience that you consider "most" people, rather than justifying why that is the most reasonable practice.
The purpose of language is communication, so if "most" people (which I mean to be laypeople off the street, which is the presumptive audience for this report) understand what it means, then it's mission accomplished. On the flip side, if the language used is deceptive/misleading, even if the underlying principle is sound, that's bad. The "most reasonable practice" question is unhelpful because it quickly devolves into questions on how society ought to work, which is subjective and no objective statements can be made about it. For instance, why even argue what the "profit" margin is? Should private entities even be making money on healthcare? Why not put out a "study" on how much unitedhealth is "stealing" from people instead? After all, the position that for profit companies shouldn't be involved in the provision of healthcare isn't exactly an uncommon position.
Insurance companies often have a parent company. That parent company owns healthcare providers and pharmacies.
So it goes something like this
United Health Group -> United Health Insurance
United Health Group -> Sunshine Hospital.
United Health Insurance has a profit cap, it’s a % of revenue. Sunshine Hospital has no cap. So Sunshine Hospital charged United Health Insurance X$ and that profit rolls up to United Health Group.
>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.
Uhh...? We know for a fact that this is how it works.
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?
>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.
...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.
So your very substantive contribution to "they're abusing market power" is the observation "they could only do this if they have market power?"
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:
>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:
I read through the first 3 and can't tell how they're related, so I'm not going to check the rest.
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.
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.
The ACA tried to address this sort of thing with a Medical Loss Ratio [1]. This basically meant that 80% of premiums had to be spent on healthcare. This has two obvious flaws:
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.
The weirdest thing about the PBM play is that the Medical Loss Ratio gives them the freedom to arbitrarily increase profit values without doing anything weird, because you can just not put any downward pressure on costs and they will just naturally rise.
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.
That 80% problem also means that there's no incentive for an executive to reduce medical costs because that would then reduce the 20% hen can allocate to henself.
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.
The point is that, to a typical person who doesn't know much about accounting or insurance, UnitedHealth's "profit margin" is understood to mean the fraction of the money I send them each month that's going into their pockets. Conventional accounting matches this intuition pretty well, and the source article's proposed alternative metric does not match it well at all.
The nice thing about stuff like this is that you can check the stock price to see if it's actually meaningful. You're not gonna surprise a bunch of wallstreet analysts with a finding that profits are actually 4x, and if you do, the gap up in stock price would be near instant.
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.
At the same tiem, lately I've been inserting small typos in my writing just to signal that it's not LLM generated. Nothing is a bigger red flag than a wall of text with perfect grammar and punctuation.
Lol, LLMs do some thing better, and some things worse than humans. And you're showing your humanity by purposefully being worse at LLM qualities, instead of beign good at human qualities?
>you're showing your humanity by purposefully being worse at LLM qualities, instead of beign good at human qualities?
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
This reduces your credibility. If I was reading, I wouldn’t think “not llm,” I’d think “not detail oriented.” You may want to find some better way that doesn’t make people think less of you.
Perfect grammar and punctuation is par for any publication.
I really don’t think you should do this. It just makes you look dumb, not authentic. There is a lot more to LLM writing than perfect grammar and punctuation that gives it away.
Certainly. But in the current social environment, being seen as (mildly) careless is less bad than being seen as someone who lets an LLM write prose for them.
I make typos all the time as well, on stuff I am just writing off the cuff like a forum or chat message. But when it comes to something important, don't you check it over dozens of times? hundreds of times? A mere missing semicolon will make your code not compile. How could you let a superficial typo go uncorrected once you see it? How could you not see it when it's in the most obvious spot?
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
Insurers in the US actually are retailing you medical services. All the large insurers own huge (and growing) numbers of medical providers and they use their insurance plans to abuse non-owned medical providers into selling out to the insurer.
Some of this has to do with limits from the ACA (Affordable Care Act), which limited the margins of insurance companies. It creates incentives for higher premiums, but also these types of gains, which is just bad for everybody.
I don't think there's much you can look at with the Affordable Care Act and think that it was a success.
Medicine is big business. Insurance exists because people are betting against their health. Profits this high indicate insurance is REALLY GOOD at getting people to bet against themselves.
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.
> Conventional accounting measures portray large health insurers such as UnitedHealth Group (UHG) as earning relatively low profit margins because they treat premium dollars that are subsequently paid out in medical claims as revenue. However, these medical claims are pass-through costs, not income retained by the insurer.
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.
I believe they are saying that only the portion of premiums paid by UHG customers _that are not_ spent on paying out claims should be counted as UHG revenue. That is if I and my employer pay UHG $18,000 over the course of the year and UHG pays out $2,500 to my doctors and to cover my prescriptions, only the remaining $15,500 should be counted as UHG revenue.
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.
Not sure I'm buying it tbh. I'm no fan of the American healthcare system, but we don't need to invent new accounting to make it look worse than it is.
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.
I respectfully disagree. Should Stripe or VISA count all charges made with their network as revenue?
Yes. Each industry has developed accounting standards that reflect the nature of their business. You couldn't run a bank or a payments company with a simple sales - COGS = gross profit model, it just wouldn't make sense.
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.
Neither Stripe or Visa count passthrough dollars as revenue. Nor should they.
Should gas stations exclude the cost of the gas they're selling as revenue? There's probably a better argument to be made that they should be included than insurance companies be excluded. Unlike insurance companies, where the costs could come in randomly and over the span of months/years, the gasoline they're selling must be replaced (no randomness element) and is turned over in a matter of days. And if you think gasoline should be exempt because "it's not money", should precious metal or crypto traders get off the hook because those aren't money either?
No - this is a false equivalence. Transaction processing companies for the most part handle the in-and-out flows as a single transaction. Insurance companies hold on to the premium pool ("float") for long enough that they have time to realize gains from investing portions of it - the inflow and outflow are very separate.
That's not a good analogy. Stripe and Visa don't deposit the money in their account and hold on to it, it literally goes directly from the payer to the payee, they just facilitate the technical movement
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
No, they're collecting money specifically on behalf of a 3rd party and then giving it directly to that 3rd party. They are custodians of that money only, it never even hits their bank account (goes into a dedicated trust account before distribution), and they cannot legally keep it. THAT is an actual passthrough.
This is addressed in the first paragraph of the pdf, with comparisons drawn to other industries and financial instruments where such income is not considered revenue. One can of course disagree whether it should be accounted this way, but the concept is not outlandish.
“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.
Seems to me that the argument is really "are my premiums a passthrough to medical providers" and I have a really hard time answering Yes to that.
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?
> if I…pay UHG $18,000 and… UHG pays out $2,500…, only the remaining $15,500 should be counted as UHG 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 Traditional View (How it actually works): If an investment fund manages $1000 of your money and charges a $150 management fee while keeping your $1000 completely separate, they made $50 on $150 of sales and have a 33.3% profit margin.
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?
I just scanned the doc but I think your question is the core argument of the doc. It explicitly says that United is using standard accounting practices and proposes the “pass through” mechanism as a “better” metric.
Based on the source I, personally, don’t find it to be a credible argument
> It explicitly says that United is using standard accounting practices and proposes the “pass through” mechanism as a “better” metric.
>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%!"
It's not a redefinition, it's a reclassification.
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)?
>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.
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"
An intuitive explanation is that financial products are, approximately, buying and selling as part of the same transaction. You can't separate the "selling premiums" part from the "paying out claims" part.
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.
This is contrary to GAAP and operationally false. An insurer takes on the risks including the health of the insured pool and cost changes during the covered period. An insurance BROKER or AGENCY only books commissions as revenue, but an INSURER books premium as revenue. Similarly a stock BROKER or AGENT is only acting as an agent and isn’t a party to the actual transaction they execute. Similarly for platforms, auctioneers, or other agents.
I work for an insurance company so can shed some light here as this article is written by someone that clearly doesn't understand how the business model works.
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.
I'm not an accountant and don't claim to have a clean answer to how it should be accounted, but I hope I can highlight the conundrum.
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.
All of this might be relevant in a conversation between accountants or investment analysts, but it's pretty obvious the "study" chose this particular methodology to get a number that makes insurance companies look as bad as possible. In this context, using their methodology does more to obfuscate/mislead than to clarify. If you say that UHI has a profit margin of 15%, most people would interpret that to mean that per $1000 worth of premiums paid, they make $150, which is exactly what happens. Their argument of "they charge $1000 in premiums, but of that $800 is paid out as costs, therefore their margin is 75%" is more confusing.
> most people would interpret that to mean
You're just asserting common convention among some implicitly selected audience that you consider "most" people, rather than justifying why that is the most reasonable practice.
Not that I consider it unreasonable (as I explained above).
Most people (in the populace) are unfortunately not numerate enough to have a thoughtful opinion on how it ought to be accounted, and are irrelevant to this discussion.
>You're just asserting common convention among some implicitly selected audience that you consider "most" people, rather than justifying why that is the most reasonable practice.
The purpose of language is communication, so if "most" people (which I mean to be laypeople off the street, which is the presumptive audience for this report) understand what it means, then it's mission accomplished. On the flip side, if the language used is deceptive/misleading, even if the underlying principle is sound, that's bad. The "most reasonable practice" question is unhelpful because it quickly devolves into questions on how society ought to work, which is subjective and no objective statements can be made about it. For instance, why even argue what the "profit" margin is? Should private entities even be making money on healthcare? Why not put out a "study" on how much unitedhealth is "stealing" from people instead? After all, the position that for profit companies shouldn't be involved in the provision of healthcare isn't exactly an uncommon position.
Insurance companies often have a parent company. That parent company owns healthcare providers and pharmacies.
So it goes something like this
United Health Group -> United Health Insurance United Health Group -> Sunshine Hospital.
United Health Insurance has a profit cap, it’s a % of revenue. Sunshine Hospital has no cap. So Sunshine Hospital charged United Health Insurance X$ and that profit rolls up to United Health Group.
>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.
Uhh...? We know for a fact that this is how it works.
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?
>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.
...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.
So your very substantive contribution to "they're abusing market power" is the observation "they could only do this if they have market power?"
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'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:
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.
The ACA tried to address this sort of thing with a Medical Loss Ratio [1]. This basically meant that 80% of premiums had to be spent on healthcare. This has two obvious flaws:
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...
The weirdest thing about the PBM play is that the Medical Loss Ratio gives them the freedom to arbitrarily increase profit values without doing anything weird, because you can just not put any downward pressure on costs and they will just naturally rise.
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.
That 80% problem also means that there's no incentive for an executive to reduce medical costs because that would then reduce the 20% hen can allocate to henself.
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.
The point is that, to a typical person who doesn't know much about accounting or insurance, UnitedHealth's "profit margin" is understood to mean the fraction of the money I send them each month that's going into their pockets. Conventional accounting matches this intuition pretty well, and the source article's proposed alternative metric does not match it well at all.
The nice thing about stuff like this is that you can check the stock price to see if it's actually meaningful. You're not gonna surprise a bunch of wallstreet analysts with a finding that profits are actually 4x, and if you do, the gap up in stock price would be near instant.
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.
It's possible for both profits to be up 4x or whatever and also Wall St to consider many other factors than profit when pricing the stock.
It's hard for me to trust this PDF when there's literally a typo directly under the author's name: "analyitcs"
At the same tiem, lately I've been inserting small typos in my writing just to signal that it's not LLM generated. Nothing is a bigger red flag than a wall of text with perfect grammar and punctuation.
Lol, LLMs do some thing better, and some things worse than humans. And you're showing your humanity by purposefully being worse at LLM qualities, instead of beign good at human qualities?
>you're showing your humanity by purposefully being worse at LLM qualities, instead of beign good at human qualities?
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
It's literally virtue signalling (Human> AI)
This reduces your credibility. If I was reading, I wouldn’t think “not llm,” I’d think “not detail oriented.” You may want to find some better way that doesn’t make people think less of you.
Perfect grammar and punctuation is par for any publication.
There's Goldilocks zone for resumes where you want enough buzzwords to get past the recruiter but not so many that Hiring manager would reject you.
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.
I don't expect perfect grammar or punctuation. I expect it look like it went through traditional spellchecker. And maybe grammarchecker.
> Nothing is a bigger red flag than a wall of text with perfect grammar and punctuation.
So you're choosing to punish well-written text?
Typo-free text. Typo-free text used to more be likely to also be well-written, but now it’s likely not to be.
But also, obviously, they’re being a gadfly for funsies.
It statrs with "At the same tiem" so it's consistent.
I really don’t think you should do this. It just makes you look dumb, not authentic. There is a lot more to LLM writing than perfect grammar and punctuation that gives it away.
typos mean its more likely to have been made by a human.
typos mean it's more likely to have been made by a careless human.
Certainly. But in the current social environment, being seen as (mildly) careless is less bad than being seen as someone who lets an LLM write prose for them.
That's kind of sad. I miss being an OG em dash user.
i make typos constantly (seriously, check my post history). i probably have typos in my resume. i just dont know why anybody should care.
the meaning is still easily parseable. i cant imagine letting something so superficial matter
I make typos all the time as well, on stuff I am just writing off the cuff like a forum or chat message. But when it comes to something important, don't you check it over dozens of times? hundreds of times? A mere missing semicolon will make your code not compile. How could you let a superficial typo go uncorrected once you see it? How could you not see it when it's in the most obvious spot?
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.
It's hard for me to trust anyone that whines on a forum about pedantics.
It's hard for me to trust it when https://en.wikipedia.org/wiki/Robert_Aderholt is the chairman.
@getnormality Two main differences:
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)
Insurers in the US actually are retailing you medical services. All the large insurers own huge (and growing) numbers of medical providers and they use their insurance plans to abuse non-owned medical providers into selling out to the insurer.
Somewhat related perhaps, "Universal Health Coverage Could Save $1 Trillion and 114,000 Lives Every Year, Yale Study Projects":
* https://ysph.yale.edu/news-article/universal-health-coverage...
Study:
* https://doi.org/10.64898/2026.07.22.26358689
Some of this has to do with limits from the ACA (Affordable Care Act), which limited the margins of insurance companies. It creates incentives for higher premiums, but also these types of gains, which is just bad for everybody.
I don't think there's much you can look at with the Affordable Care Act and think that it was a success.
Well this hasn't been peer reviewed whatsoever, WOW.
Medicine is big business. Insurance exists because people are betting against their health. Profits this high indicate insurance is REALLY GOOD at getting people to bet against themselves.
"getting people to bet against themselves" ie forcing them to via oligopoly and regulatory capture.
People are extremely risk averse on this, which makes sense.
I don't understand.
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.
>I don't understand
If you don't understand why are you commenting?
Your response makes absolutely no sense at all.
This is a crime against humanity.
Luigi intensifies
UnitedHealth just raised my monthly premium by 25% for 2026-27
If you substitute the word "Claims" for the word "Reveals" then the headline is honest.
So many die every year because of the US' dogshit system -- and it's never enough.
Just a need a few more Luigi's to even the score.
Even a few would change the system for the better.