Ruminations, October 11, 2009

What do insurance companies do with all that money?

Dr. Hershey Garner is an oncologist who attended the President Barack Obama’s conference on health care last week. He supports the President and appeared on Public Broadcasting’s Newshour program facing a doctor who opposes Obama’s health care program. At one point, near the end of the segment, Garner said, “I think what I don't understand and didn't hear a response to is the 22 percent to 23 percent of every dollar that the insurance companies take out that don't go to health care.”

Garner’s question is a fair one and, because time ran out, he never got an answer. He deserves an answer.

In round numbers, it’s true that for every $5 in premium that an insured pays to a health insurance company, $4 is paid out for health care. Where does the other dollar go?

It goes to expenses. Those expenses include:

• Billing expenses. Insurers have to produce a bill to you or your employer, mail the bill and late notices, pay for the postage, collect the premium and ensure that the premium is posted to the correct account.
• Claims adjustment. Each claim must be examined. Sometimes mistakes are made and not everyone who deals with insurance companies is honest.
• Legal expenses. Lawyers prepare the legal insurance contracts as well as file the insurance plans in conformance with the requirements of each of the 50 states. They also defend insurance companies in legal suits and may defend policy holders as well.
• Underwriting. This is where the individual policy applicant’s risk is assessed. A company determines the risk and price of insurance by a number of risk factors.
• Reinsurance. A reinsurance company is an insurance company’s insurance company. To avoid extraordinary losses, an insurance company will reinsure its risks. Of course, it pays a premium to the reinsurer.
• Actuarial. Actuaries determine the probability of an insurer’s risk. This is where an insurer determines how much risk it can afford, how much premium it must charge.
• Sales commissions. You don’t think that insurance sells itself, do you? Commissions are paid to agents who sell the insurance.
• Profit. Yes, profit is an expense. During a year of unanticipated claims, profit is the first casualty of the balance sheet. During a year with fewer than anticipated claims, profit will catch the extra income. Profit generally runs around 4 percent.
• As a large enterprise, an insurer has the typical expenses for personnel, marketing, computers, telephones, offices space, furniture, etc.

Of course, expenses can fluctuate. Insurers are motivated to reduce expenses by competition and because lower expenses can contribute to profits.

This incomplete list should provide some answers to Dr. Garner and help him evaluate the cost of insurance.

Influencing other countries

In 1956, Soviet Premier Nikita Khrushchev, through a representative, contacted Democratic presidential candidate Adlai Stevenson. Stevenson was told that Khrushchev and the Soviet leaders favored Stevenson over the incumbent Dwight Eisenhower and wanted to help. All Stevenson had to do was to tell the Soviets what to do: attack Stevenson, attack Eisenhower, provide money or create a foreign incident?

Stevenson, true American that he was, told Khrushchev to take a hike. Americans would decide American elections on their own.

Evidently, the Norwegian Nobel Committee doesn’t hold with the Stevenson philosophy. They seem to believe that Norwegians should influence American politics and that includes not only current politics but influencing history.

In selecting President Barack Obama to receive the Nobel Peace Prize, they seem to be saying, one more time, “In your face, George W. Bush.” If there is any doubt, remember when the committee selected former President Carter, they described their selection as an overt criticism of Bush’s policies and a “kick in the leg” to the supporters of said policy.

The Nobel Committee didn’t like Bush in 2002, so they selected Democrat and Ex-President Jimmie Carter as its recipient.

The Nobel Committee didn’t like Bush in 2005, so they selected Bush opponent Mohamed El Baradei as its recipient.

The Nobel Committee didn’t like Bush in 2007, so they selected Democrat and Ex-Vice President Al Gore as its recipient.

And in 2009, The Nobel Committee still didn’t like Bush, so they selected Democrat and President Obama as its recipient.

It seems kind of childish, doesn’t it?

If President Obama had had a Stevenson moment, he might have told the Nobel Committee that Americans would decide American policies on their own. But by comparison, Obama has a lot more class than the Nobel Committee.