Premiums earned, Net - Health insurance
Premiums earned are the amount of premiums that have been recognized as revenue over a specific period, adjusted for unearned premiums (premiums received for future coverage).
Guide to Health Insurance Industry KPIs
This guide highlights the key performance indicators for the health insurance industry and where investors should look to find an investment edge. While this guide is not a fully integrated health insurance industry primer, as the market leader in granular consensus estimates data, Visible Alpha works with partners and clients to determine the key performance indicators in the industry. This guide will aid market participants in identifying industry KPIs and the potential future performance of health insurance companies, by region and service type.
Industry Business Model
Revenue
Insurance is fundamentally about managing “risk,” or the likelihood and potential financial impact of losses. In any insurance arrangement, each party aims to reduce their own risk. In health insurance, consumers and insurers handle this risk differently.
Consumers buy health insurance to protect themselves from the financial burdens of future medical care. On the other hand, insurers use various strategies to minimize risk and ensure profitability. For example, insurers limit their coverage to a predefined list of services, known as “covered” services. They also encourage healthier individuals to get insurance, as healthier people are less likely to make frequent claims.
Insurers also spread risk across a large group of people through a collective fund called the risk pool. By pooling contributions from all members, the costs incurred by a few individuals are shared among the entire group.
Insurance companies calculate and charge a rate, also known as the “premium” to finance the health coverage it provides. The premium is based on several factors, including the expected annual cost of healthcare claims, administrative costs, and a profit margin. If an insurer accurately predicts these costs and sets the premium accordingly, the risk pool achieves an equilibrium. In this situation, the premiums paid by healthy individuals in the risk pool help subsidize the higher-than-average costs of less healthy individuals in the pool. Premiums earned by health insurers can be categorized as:
- Individual premiums: Individuals purchase health insurance plans directly from insurers. Premiums are the regular payments policyholders make, typically every month, for coverage.
- Employer-sponsored premiums: Employers offer health insurance plans to their employees, often as part of a benefits package. Employers and employees both contribute to premium payments, with the employer usually covering a significant portion of the costs.
- Government programs: Insurers may participate in government-sponsored programs like Medicare and Medicaid, receiving payments for managing and providing services to enrollees.
Premium earned by a health insurer is a function of the total members in the risk pool and the premium charged per member per month (PMPM). The formula for calculating the premium earned is:
Premiums Earned=Total Membership × PMPM
Here, total membership is the number of individuals covered by the insurance policy. PMPM is the premium amount charged to each member on a monthly basis.
Many health insurance companies include prescription drug coverage as part of their overall health plans. A portion of the premium revenue is allocated specifically for covering pharmacy-related expenses, such as the cost of medications and pharmacy services. Health insurers often work with Pharmacy Benefit Managers (PBMs) to manage drug benefits. Some health insurers may also own PBMs, in which case pharmacy-related revenue is a direct contributor to the insurer’s overall revenue.
For insurers with integrated pharmacy services or partnerships with PBMs, pharmacy revenue can include income from drug rebates, discounts negotiated with manufacturers, and margins on drug sales. This revenue is tied to the premiums paid by members since a portion of the premium is intended to cover pharmaceutical services. While the exact proportion of pharmacy revenue as part of premium revenue varies across health insurers, pharmacy services are often a significant part of overall health costs. Hence, premium revenue tied to pharmacy benefits is a key aspect of an insurer’s financial structure.
Health insurance companies also generate revenue through fees and commissions. Health insurers use fees and commissions as supplementary revenue streams alongside the primary income from policyholder premiums. Fees include income generated from:
- Administrative fees: Health insurance companies may charge administrative fees for managing and processing claims, handling customer service, and other operational tasks. These fees can be applied to both individual policyholders and employer-sponsored plans.
- Network access fees: Insurers might charge healthcare providers network access fees for being part of their provider network. These fees are often negotiated as part of contracts between insurers and providers.
- Service fees: Additional services such as wellness programs, telemedicine services, or other supplementary offerings might come with service fees that contribute to the insurer’s revenue.
Commissions include income generated from:
- Broker commissions: Health insurance companies often work with brokers and agents who help sell their policies. These brokers earn commissions based on the policies they sell, which is a percentage of the premium paid by the policyholder.
- Renewal commissions: Commissions are not just a one-time fee; brokers may also receive renewal commissions if the policyholder continues their coverage in subsequent years.
- Bonus commissions: Sometimes insurers offer bonus commissions or incentives based on sales performance, such as achieving certain sales targets or maintaining a high level of client satisfaction.
Lastly, health insurance companies also derive revenue from investments. This includes investments in bonds, equities, real estate, and other investments. However, the scale of investment income typically depends on market performance and the company’s portfolio.
Premiums typically represent a significant portion of overall revenue for health insurance companies compared to fee, commission income, and investment income
Health Insurance Industry Business Models
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Expenses
Health insurance companies incur various major expenses in their operations. Here are the key categories of expenses:
- Policy-related costs: These are costs directly associated with issuing and managing insurance policies, such as claims paid out, pharmacy claims, administrative expenses specific to policies, etc.
- Operating costs and expenses: These are general expenses involved in running the insurance company that are not directly tied to individual policies. Examples include salaries, office rent, utilities, etc.
- Total benefit, loss, and expense: This typically refers to the sum of all benefits paid out, losses incurred, and expenses related to health insurance operations.
- Medical loss ratio (MLR): This is a key metric used by health insurance companies to evaluate the percentage of premium dollars that an insurer spends on providing medical care and improving health outcomes, as opposed to administrative costs or profits. It is an important indicator of how efficiently an insurer is using its premium income to pay for healthcare services versus other costs like administrative expenses and profit margins. MLR is calculated as:
Medical Loss Ratio=Policy–Related Costs / Premium Earned
Profitability
Key financial metrics used to evaluate health insurers include:
- Total payout ratio: This ratio is used to measure the proportion of an insurance company’s premiums that are paid out in claims and benefits. This ratio provides insight into how much of the premiums collected are being used to cover claims versus other expenses, such as administrative costs and profit.
- Operating margin: The percentage of revenue left after deducting operating expenses, which shows the company’s operational efficiency.
- Return on equity (ROE): A measure of how profitable a company is in relation to its shareholders’ equity, indicating how well the insurer uses shareholders’ investments to generate profit.
Key performance indicators (KPIs) are the most important business metrics for a particular industry. When understanding market expectations for the health insurance industry, whether at a company or industry level, some KPIs to consider include:
Visible Alpha’s Standardized Industry Metrics
To understand market expectations for the health insurance industry, a key information source is sell-side analyst estimates and consensus forecast data. The buy-side, sell-side, and public companies leverage this type of data to conduct competitive analysis, a type of analysis conducted by professional analysts that involves comparing standardized metrics of one company with those of similar companies. Because companies report metrics differently – and sometimes report on different metrics altogether – standardizing the key metrics for each company can be a cumbersome process.
Visible Alpha Insights includes analyst data, company data, and industry data at a level of granularity unparalleled in the market. Our industry data – Standardized Industry Metrics – enables market participants to quantify and compare market expectations for companies across 150+ industries.
Data as of August 28, 2024
52
Global Tickers
817
Current Analyst Excel Models
654
Proprietary line items in our standardized operating metrics data
83
Contributing Brokers
866
Total standardized line items
212
Unique Line Items In Our Standardized Financials Data
Visible Alpha offers 18 life & health insurance-related comp tables, comparing forecasts for key financial and operating metrics, to make it easy to quickly conduct relative analysis, whether you are interested in looking at key values for global companies, Americas, or Europe. Every pre-built, customizable comp table is based on region, sub-industry, or key operating metrics.
NORTH AMERICA
- UnitedHealth Group (NYSE: UNH)
- Elevance Health (NYSE: ELV)
- Centene Corp (NYSE: CNC)
- Humana (NYSE: HUM)
- Molina Healthcare (NYSE: MOH)
- Oscar Health (NYSE: OSCR)
- Alignment Healthcare (NASDAQ: ALHC)
- CNO Financial Group (NYSE: CNO)
- Globe Life (NYSE: GL)
APAC
- NIB Holdings Limited (ASX: NHF)
LATAM
- Porto Seguro SA (BVMF: PSSA3)
Industry KPI Terms & Definitions
Visible Alpha offers an innovative, integrated experience through real-time, granular consensus estimates and historical data created directly from the world’s leading equity analysts. Using a subset of the below KPIs, this data can help investors hone in on the key drivers of companies to uncover investment opportunities.
Medical Loss Ratio (MLR)
Medical loss ratio is the percentage of premiums spent on providing medical care and health services, rather than on administrative costs and profits.
Risk Pooling Ratio
Risk pooling ratio is the ratio of the total number of insured members to the total number of high-risk members in the pool. It helps assess the balance of risk within the insurance pool.
Premiums Earned
Premiums earned are the amount of premiums that have been recognized as revenue over a specific period, adjusted for unearned premiums (premiums received for future coverage).
Total Membership, Medicare Advantage
Total membership, Medicare advantage refers to the total number of individuals enrolled in the Medicare Advantage program at a given point in time.
Total Membership, Medicare Supplement
Total membership, Medicare supplement (Medigap) refers to the total number of individuals enrolled in Medicare Supplement insurance plans offered by private insurers.
Total membership – Health insurance
Total membership refers to the sum of individuals enrolled in both the Medicare Advantage program and Medicare Supplement insurance plans.
Per Member Per Month, Medicare
Per member per month (PMPM), Medicare refers to the average amount of revenue, cost, or expenditure per Medicare beneficiary on a monthly basis.
Per Member Per Month, Medicaid
Per member per month (PMPM), Medicare refers to the average amount of revenue, cost, or expenditure associated with each Medicaid beneficiary on a monthly basis.
Total Benefit, Loss, And Expense
Total benefit, loss, and expense refers to the sum of all benefits paid out, losses incurred, and expenses related to health insurance operations.
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Guide to Health Insurance Industry KPIs for Investment Professionals
This guide highlights the key performance indicators for the health insurance industry and where investors should look to find an investment edge, including:
- Health Insurance Industry Business Model & Diagram
- Key Health Insurance Industry Metrics PLUS Visible Alpha’s Standardized Industry Metrics
- Available Comp Tables
- Industry KPI Terms & Definitions
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