Gross versus net margin. The other commenter was saying they don't have incentives to cut costs because of the MLR limit, but that limit is a 25% margin over the cost of their "product." For a product that boils down to just moving money around, 25% is pretty good.
This is illustrated by the fact that they aren't actually bumping into the legal MLR limit currently. It would make sense if they don't care about cutting costs because the law doesn't allow them to spend less, but that's not where they are at the moment. If they could cut their medical spending by 1% they could increase their profit by 40%.
> The other commenter was saying they don't have incentives to cut costs because of the MLR limit, but that limit is a 25% margin over the cost of their "product." For a product that boils down to just moving money around, 25% is pretty good.
I don’t know where you are getting 25% from. See exhibit 2:
Medical loss ratios float between 80% to 90%, leaving 10% to 20% for operating costs and profit.
Their “product” requires enormous manpower to negotiate contracts, handle customer service, lawyers for the government, and most of all, employ doctors and pharmacists to adjudicate claims.
> It would make sense if they don't care about cutting costs because the law doesn't allow them to spend less, but that's not where they are at the moment.
Of course, and the obvious fact of the matter is insurance prices are heavily regulated and there is competition, so they already have an incentive to control costs in order to control premiums. Which is literally what their customers pay them for, to negotiate with healthcare providers with whom customers usually wouldn’t have leverage against.
>If they could cut their medical spending by 1% they could increase their profit by 40%.
Sure, but in industries like insurance and retail, the low single digit profit margins indicate a more pressing need to survive, rather than increase nominal profit.
You’re right, I had the idea that you divide by cost, not revenue. So a 20% legal maximum margin. Which is still a fair bit above what they actually achieve, so there’s plenty of motivation to reduce their medical spending.
This is illustrated by the fact that they aren't actually bumping into the legal MLR limit currently. It would make sense if they don't care about cutting costs because the law doesn't allow them to spend less, but that's not where they are at the moment. If they could cut their medical spending by 1% they could increase their profit by 40%.