BUSI 523 Week 5 Discussion Board Forum 2 Thread Example

Discussion Board Forum 2 Thread: Insurance, Premiums and Where the Money Goes

BUSI 523 Financial Analysis and Decision Making in Healthcare, Discussion Board Forum 2 Thread

Thread by [Student Name]

The employer, the insurer and the physician group are composites; the textbook, Scripture and the peer-reviewed sources cited are real.

Last month a 60-employee metal fabrication company in our region received a check for $14,000 from its small-group health insurer, along with a notice explaining that the insurer had spent less than 80% of the year's premiums on medical care and quality improvement. The company's owner called his benefits consultant to ask whether the insurer had made a mistake. It had not. The check was a medical loss ratio rebate, and the owner's question led to a better one: if the insurer kept less than 20 cents of each premium dollar for administration and profit, where did the rest of the money go, and who decides what counts as medical care?

Harrington (2016) explains that an insurer's premium must cover expected claims for the group, the insurer's administrative costs, such as claims processing, sales and customer service, and a margin for profit or reserves. Insurers estimate claims from the group's characteristics and past experience and add loadings for administration and risk. Before 2011, nothing limited how large those loadings could be, and in the individual market they were often substantial. The Affordable Care Act's medical loss ratio rule changed that by requiring insurers to spend at least 80% of premiums in the individual and small-group markets, and 85% in the large-group market, on claims and activities that improve health care quality, and to rebate any shortfall to policyholders.

Early evidence showed that the rule worked mainly by squeezing administration. Abraham et al. (2014) examined 2010 and 2011 data and found that the share of individual-market insurers meeting the 80% standard rose from 44.3% to 63.2% in a single year, while small-group insurers changed little, since most already complied. Insurers far below the standard improved most, largely by reducing administrative expenses rather than by paying more claims. McCue and Hall (2015) found that by 2012 insurers' median loss ratios were still rising and their administrative cost ratios falling, but that quality improvement spending remained very low and varied widely by ownership. The rule therefore reduced overhead and produced rebates, but it did not push insurers to invest heavily in quality.

A newer development complicates the picture. Large insurers have bought physician practices, and when an insurer pays a practice it owns, that payment counts as medical spending under the rule, even though the money stays inside the same corporate family. Lake et al. (2026) studied the physician practices acquired by Optum, the largest insurer-owned provider, which bought 44 practices employing 7,828 physicians by 2023. For most acquired practices, prices paid by competing insurers did not change significantly after acquisition, but the single largest acquisition was associated with a 4.5% relative price increase. The evidence does not show widespread abuse, but it shows why the ratio alone can no longer tell an employer how much of its premium leaves the insurer's corporate family.

Integration can also bring benefits, such as shared records and coordinated care, so the goal is visibility rather than prohibition. I recommended that the manufacturer's consultant ask at each renewal what share of claims the insurer paid to affiliated providers and how those rates compare with rates paid to independent practices, and that our state's insurance regulator require insurers to report affiliate payments separately.

When Paul collected money from the churches for believers in Jerusalem, he arranged for trusted companions to travel with the gift, so that no one could fault how the large gift was administered; he wanted the handling to look right to people as well as to God (English Standard Version Bible, 2001/2016, 2 Corinthians 8:20-21). An insurer holding other people's premiums owes them the same kind of visible honesty, especially when it pays itself. Have any of your organizations seen a premium rebate, and did anyone ask what the insurer's affiliated providers were paid?

References

Abraham, J. M., Karaca-Mandic, P., & Simon, K. (2014). How has the Affordable Care Act's medical loss ratio regulation affected insurer behavior? Medical Care, 52(4), 370-377. https://doi.org/10.1097/MLR.0000000000000091

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Harrington, M. K. (2016). Health care finance and the mechanics of insurance and reimbursement. Jones & Bartlett Learning.

Lake, D. T., Casalino, L., Richards, M., Nicholson, S., Fernandez, R., O'Connell, B., Zhang, M., & Braun, R. T. (2026). The impact of health insurer acquisitions of physician practices on prices and patient visits. Health Services Research, 61(2), e70025. https://doi.org/10.1111/1475-6773.70025

McCue, M. J., & Hall, M. (2015). Health insurers' financial performance and quality improvement expenditures in the Affordable Care Act's second year. Medical Care Research and Review, 72(1), 113-122. https://doi.org/10.1177/1077558714563172