Medical Bill Payment Delays – #1 payer tactic to increase profit at provider’s expense

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Q: Do insurance companies benefit from delayed payments? A: Yes they do. Payment delays are directly proportional to profit: the longer the delay, the higher the profit. In some cases, half of their profit margin comes from the float, such as Aetna in 2006:

1. Bonus 7%
2. Interest on premium 7%
3. Total 14%

Insurance companies have often accused doctors of submitting incomplete and inaccurate claims, citing the delays as the time it takes to uncover fraudulent claims. However, some states found the plans guilty and fined them for intentionally delaying payments to benefit from the “float.” For example, United HealthCare Georgia paid $123,000 as early as 1999, and Coventry HealthCare of Georgia (formerly Principal Health Care of Georgia) and Prudential HealthCare Plan of Georgia paid nearly double that amount. A brief overview of the financial key performance indicators of basic insurance helps to understand the dynamics mentioned above. An insurance company offers customers a premium based on the expected cost of care plus a premium for administration costs and profit. Accordingly, most analysts use three metrics to measure payer financial performance:

• Administrative Cost Ratio (ACR): The ACR is the ratio of administrative and distribution costs to total premium income.
• Medical Loss Ratio (MLR): The MLR is the ratio of medical expenses to premium income.
• Investment Ratio (IR): The investment ratio is equal to the net investment income divided by the income from bonuses and fees.

For example, in 2007, Aetna showed the following performance:

1. Awards and Fees $25,500 million
2. MLR 72%
3. ACR 21%
4. Combined ratio 93%
5. Implied operating margin 7%

Note that other factors also affect profitability, most notably legal fees. But an insurer can make a profit even when the costs of administration and insurance claims exceed the premiums it collects. It does this by investing income from outstanding shares and bonds between the time a customer pays a premium and the time the customer requires payment of their medical expenses. In the example above, if we add MLR and ACR together, we see that without any investment, Aetna would make a 7% profit on its premiums alone. Nonetheless, Aetna uses the float and earns about 7% net interest income on the premiums, bringing its overall profit margin to about 14% (excluding taxes and other revenue streams). References:

1. Financial Statements (wikinvest.com/stock/Aetna_(AET) September 24, 2008)
2. Wayne J. Guglielmo, “Prompt Pay Laws Are Finally Getting Teeth,” Medical Economics, January 22, 2001).

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