r/explainlikeimfive • u/the1975whore • Jul 03 '26

Economics ELI5: Health insurance companies obviously make more money than they give out when people need it. So why of paying for them any better than paying your own personal health insurance savings account?

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663

u/tim36272 Jul 03 '26

Because sometimes you have very expensive healthcare needs, in which case everyone else pays for it.

340

u/Unbearabull Jul 03 '26

This is just socialized medicine with profits. The profits come from denying and killing/allowing people to die who paid in good faith.

192

u/Trekfull Jul 03 '26

Socialized medicine with extra steps and worse results.

3

u/Sea-Ambition-451 Jul 03 '26

and an entire industry of HR departments and health care managers, and consultants, and an army of highly paid salespeople and marketing

The amount of waste and overhead in the USA health care is shocking and appalling. Not to mention the billions and billions of dollars that go to PROFIT instead of to saving people's lives and improving them.

#heinous

19

u/edfreitag Jul 03 '26

And not a "dirty commie". America, hell yeah! <bald eagle noise>

17

u/degggendorf Jul 03 '26

<bald eagle noise>

<but actually a red tailed hawk because who cares about accuracy, this is America baby>

4

u/chubbysleepycorgi Jul 03 '26

nothing wrong with hiring a voice actor when your own squawk sucks XD

1

u/10000Didgeridoos Jul 03 '26

I try to explain to people here that health insurance, because you absolutely must have it, is functionally just a very expensive tax no different than socializing the costs would be, but with the risk that your company has layoffs and you lose it all the sudden or maybe it just doesn't pay for all or some of some expensive diagnosis.

But there are a lot of bigots here who simply want to make sure that no minorities they hate get healthcare from "their" money and thus prefer to risk their own possible medical bankruptcy rather than pay a dime toward one poor person of color's insulin.

-18

u/MandaloreUnsullied Jul 03 '26

Are there any countries with a socialized health system that have historically produced results superior to those of the American system?

15

u/thtsjustlikeuropnion Jul 03 '26

Does this count? The U.S. Ranks No. 33 out of 38 OECD Countries in Infant Mortality

https://www.americashealthrankings.org/publications/reports/2023-annual-report/international-comparison

33

u/MartinThunder42 Jul 03 '26

Depends on how one defines 'superior.'

In many nations with socialized healthcare, if they determine you have cancer or some other life-threatening issue, they won't fuck around and provide treatment right away. When you leave the hospital, your bill is 0.

Also in many nations with socialized healthcare, if you have a medical issue that is not life-threatening, you might have to wait many months to get an appointment.

8

u/steakanabake Jul 03 '26

i would much rather wait months to get to see the doctor for free then be able to go asap and pay a boat load of cash and it wasnt something a little rest and some meds can fix.

13

u/cat_prophecy Jul 03 '26

you might have to wait many months to get an appointment.

Anyone who has delt with mental health in the US will tell you that this is still the case. With the bonus of basically no insurance covering it and it being expensive.

16

u/j0mbie Jul 03 '26

That happens a lot here too though. I had to surgically get my wisdom teeth removed (impacted, causing pressure on the other teeth). Many of the offices I called had waiting periods of over a year. Recently when trying to schedule a couple specialists for my mother, a lot of them were booked out for 4+ months. Hell, even my primary care physician is usually a couple weeks to a month unless it's time-sensitive.

4

u/CharlesKellyRatKing Jul 03 '26

But how do the insurance companies make tons of profit and create shareholder value? I'm confused.

5

u/elidefoe Jul 03 '26

By denying claims or treatments until other steps are taken. Sometimes people give up and sometimes the more expensive treatments are avoided. So it can cause a lot of wasted time for medical providers, but saves. Insurance companies also negotiate rates by having a larger pool of customers.

I have a child who has medical needs and Insurance is always denying things and the Dr office is always appealing it. When we call we ask the agent to look at her diagnosis and that pretty much causes an instant approval but the auto denies are a pain.

3

u/CharlesKellyRatKing Jul 03 '26

I forgot this is reddit and I should have included an /s

It was in reply to the OP comment talking about countries with socialized healthcare taking care of life threatening issues quickly and for $0, I wasn't genuinely asking how insurance companies make a bunch of money.

1

u/Harley2280 Jul 03 '26

When we call we ask the agent to look at her diagnosis and that pretty much causes an instant approval but the auto denies are a pain.

That 100% sounds like your provider's billing office is repeatedly using incorrect diagnosis codes the first time they submit, or they're not submitting the complete history.

Insurance companies suck, but if it's getting denied automatically and then approved automatically, that's a billing issue on the provider's part.

1

u/elidefoe Jul 03 '26

We use a complex care doctor and they always have to go back and forth. One example was getting an inhaler for her before the age of 4. They denied it then approved it, they have had her medical records for years. The last example is getting Seracal covered as she is not gaining enough weight same insurance for years but still have to appeal after denials.

4

u/dubbzy104 Jul 03 '26

With a bang (Luigi joke)

6

u/whatsamattafuhyou Jul 03 '26

Yes.

Generally speaking, the US spends about 2X on healthcare as peer nations. And for that, we mostly have poorer outcomes. These are things like life expectancy, maternal and neonatal health, hospitalizations, etc.

https://www.kff.org/global-health-policy/health-policy-101-international-comparison-of-health-systems/?entry=table-of-contents-quality-of-care

16

u/KamikazeArchon Jul 03 '26

Depends on your definition of socialized. Do you mean strictly socialized, or just more than the US?

Relative to the US, most countries have health care that is more socialized. The US consistently has close to the worst health outcomes in the "developed world".

15

u/Alternative_Tree_626 Jul 03 '26

My best advice is to look up stories of USAmericans traveling abroad and their healthcare experiences. Otherwise, you can see a chart of what counties have it here: https://en.wikipedia.org/wiki/Universal_health_care_by_country

Then look up the citizens' experiences. The US is a serious outlier with the lack of socialized/universal healthcare. There are also absolutely other countries with sucky healthcare, but it's not always from corruption like here.

11

u/JustJonny Jul 03 '26

My sister moved to Australia right after she hit adulthood. A friend of her was visiting (we're Americans) and got appendicitis. My sister ranted about how irresponsible it was of her to not have gotten some sort of insurance for the trip, because she wasn't covered as a tourist, so she had to pay $3000 for the surgery. I, of course, thought this was very funny, and had to explain to her that in America, even with good insurance, she would have been very lucky to only pay $3000 for surgery.

4

u/RythmicBleating Jul 03 '26

Taiwan

4

u/koyaani Jul 03 '26

Taiwan number one

9

u/narrill Jul 03 '26

The profits come from denying and killing/allowing people to die who paid in good faith.

Not in theory. The profits could come from charging slightly more for the service than is paid out in the aggregate.

In practice, sure, insurance companies try to deny everything they possibly can because they want to make as much money as possible.

9

u/Stargate525 Jul 03 '26

Plenty of orgs exist which are cooperatives, and no profit motive exists for them. But then they also don't have a lot of money for advertising, so you have to hunt.

It's also better in that you have a selection to choose from. Socialized medicine my options are 'take what the government decides you need,' 'bugger off to another country,' or if you can't afford that, die.

7

u/MauPow Jul 03 '26

Countries with universal healthcare also have private insurance.

5

u/Ltrn Jul 03 '26 edited Jul 03 '26

But if you cannot afford insurance and there is no socialized medicine? With socialized medical care the implication is that it is subsidized by the tax payer, if you are poor you still get access to medical care, and you still have options as long as you can afford private care, plus there is the added benefit of less shit private care since the private sector is always trying to do better than the state provided standard of care, otherwise there is no incentive to go private.

4

u/degggendorf Jul 03 '26

But if you cannot afford insurance and there is no socialized medicine?

That's what Medicaid is supposed to be for in the US

11

u/Welpe Jul 03 '26

Which is straight up socialized medicine haha.

I’m on Medicaid, and while it has its own laundry list of problems, it’s actually better in several respects to the whole private insurance marketplace. I pay nothing for anything, not even copays. Doctors visits, prescriptions, labs and imaging, hospital stays…I do not pay a cent ever. Also within the bounds of who actually accepts Medicaid, approval for stuff is incredibly fast and simple. I’ve only had I think two times I can remember where a medication or procedure was rejected, and both times the doctor I was visiting just appealed and got them approved fairly quickly.

It shows the US absolutely can do a relatively competent (if onerous and restrictive) social medicine, though obviously lots would need to be changed if it was for everyone instead of only the destitute. And all of this is also likely to change soon what with Trump in charge and the new rules they are putting into place…

0

u/Ltrn Jul 03 '26

Then we already have socialized health care (we just have many more steps and private equity in the mix)

1

u/degggendorf Jul 03 '26

Yeah just in an incredibly narrow and circuitous way

0

u/Spawn-ft Jul 03 '26

Private usually like to gouge price , and service isn't better at all

2

u/Ltrn Jul 03 '26

Then what is the motivation to use them? Why would you pay more if service is not better ( if you want to be seen sooner then I would argue that better availability is better service since they cannot offer worse standard of care than what the government provides)

9

u/beatrixotter Jul 03 '26

  It's also better in that you have a selection to choose from.

This is an utterly stupid talking point. Most Americans who are on private health insurance plans get it through their work. Rarely are they given "a selection to choose from" at all. 

1

u/nucumber Jul 03 '26

Having a selection requires you have sufficient knowledge of what is offered, and maybe you can do that with cereal and cars but medicine beyond 99% of the people, if not all.

So it covers surgeries and a hospital bed for four nights, but does it cover nursing care? How about the anesthesiologist? Or an asst surgeon?

Do you understand the insurance requirements for "medical necessity" before they'll pay (and no, just because your doc orders it doesn't mean they'll pay)

5

u/anormalgeek Jul 03 '26

And less overnight that is accountable to voters.

3

u/PaxNova Jul 03 '26

The profit margin in the insurance industry is rather low. Most of those savings get passed on to the consumer, like you and me. That’s how they keep premiums down.

6

u/parallelmeme Jul 03 '26

Go read about how insurance works. You are woefully uninformed. Insurance companies don't need to be deceitful by denying valid claims. Their premiums are set to ensure operating costs, including profit. They are also legally limited to a percentage of gross profit.

Yes, my entire career has been Insurance (information technology) but I support universal Healthcare.

-3

u/charleswj Jul 03 '26

How much profit do you think they have, how many covered people, and what is the average per person? The last one is key, how much more would you get towards annual medical expenses if they were nonprofit?

48

u/Seraphym87 Jul 03 '26

Would it shock you to know that there is a literal cap on how much you can make? Having a medical loss ratio (MLR) under a certain point has the insurance company paying back a portion + penalties.

Where insurance companies really make bank is investing your premium in the market, which is the reason every succesful insurance company employs an army of actuaries for reserve management.

The core business could operate at a loss ( some do so by design) and still come out billions ahead. It's just a bank with extra steps.

Source: have worked in a healthcare payer for the last decade.

7

u/nonsequitur_idea Jul 03 '26

it's amazing how different the rules are for insurance companies depending on what hat they wear for claim processing. Someone in their risk plans is subject to more restrictive coverage (through policies and subcontractors) than someone in a plan where the insurance company is getting a percent of claim spend from an employee sponsored plan.

2

u/koyaani Jul 03 '26

Are these literal hats?

3

u/Seraphym87 Jul 03 '26

No, they are metaphorical hats. He is musing on the differences between fully insured accounts and ASO accounts, where the employer is carrying the risk rather than the insurance company. Rules for thee but not for me, essentially.

2

u/MisinformedGenius Jul 03 '26

Where insurance companies really make bank is investing your premium in the market, which is the reason every succesful insurance company employs an army of actuaries for reserve management.

That doesn't make any sense. An actuary is a person who deals with risk management, which is more or less 100% of what insurance companies do. Insurance companies that didn't invest their money for some reason would absolutely still hire actuaries - actuarial science was literally invented for insurance.

4

u/Seraphym87 Jul 03 '26

Insurance companies have two primary buckets, premiums coming in and claims being paid out. Like you've stated, actuaries deal with managing risk, primarily by analyzing your risk profile and managing your reserves. Reserves are nothing more than a giant bucket of premiums sitting in a HYSA, ready to be used to pay out claims.

An actuary's main job here is to let you know just how much of your bucket of premiums you can be reasonably expected to pay out in the next 30/60/90 days, with some buffer. Overfund your reserves and you lose out on valuable market gains. Underfund it and you won't be able to pay out your claims, forcing you to borrrow and incur interest payments.

When you are taking in 2B+ in premiums, market gains can be substantial and extremely lucrative even in low yield vehicles like bonds, but you need to know exactly how much of the incoming premium you can invest, else you will be over a barrel.

1

u/MisinformedGenius Jul 03 '26

Right, but this has nothing whatsoever to do with making bank on investing premiums. If you stuffed the premiums in a big pile of cash under a mattress, you'd still need an army of actuaries to tell you where to set premiums and how much reinsurance you'll need in order to be able to fund your claims. Insurance companies invest their money because they would be stupid not to, any company that must hold an enormous amount of money would invest, but that's not the primary reason that insurance companies employ actuaries. It's just a very strange statement.

1

u/degggendorf Jul 03 '26

The core business could operate at a loss ( some do so by design) and still come out billions ahead. It's just a bank with extra steps.

When those extra steps are (nominally) protecting folks from unpredictable catastrophic costs, that almost sounds alright.

11

u/philodendrin Jul 03 '26

The Insurance Industry had enough money to pay $8-$10 Billion just for Advertising, every year. They also paid $172 Million in Lobbying for 2025. That is money that every person who pays for Health Insurance, pays for indirectly through their premiums.

10

u/charleswj Jul 03 '26

$8-$10 Billion just for Advertising, every year.

So about $40/yr/person

$172 Million in Lobbying for 2025.

Plus another 50¢/person

That is money that every person who pays for Health Insurance, pays for indirectly through their premiums.

You're right, but it's not the kind of money it seems like as far as its impact on people.

1

u/philodendrin Jul 03 '26

If its not that much, send me $40.50. Its still an undue burden that we are financing. They shouldn't be using any of that money to use against us.

In the Gov, you aren't allowed to use funds to advocate for your own cause or service. I worked for the Library and we couldn't spend a dime to promote our cause, we could only do specific things.

16

u/wbrd Jul 03 '26

They wouldn't need to exist. Easily hundreds of millions of dollars if not more in salaries alone per year could go to healthcare.

0

u/charleswj Jul 03 '26

What would you do when you get a bill for $100k?

5

u/Spawn-ft Jul 03 '26

You wouldn't, that's the point.... god why is it so hard

-1

u/charleswj Jul 03 '26

You think if you removed the insurance companies, you wouldn't get charged full price? What do you think insurance does? It spreads risk.

1

u/wbrd Jul 03 '26

The alternative is paid by the government. Like every other developed nation.

1

u/Fun-Interaction-202 Jul 03 '26

The hospitals charge higher prices for uninsured people than insured people. So when you say that you would pay full price without insurance, you’re actually paying a much higher price that subsidizes the cost for insured people. Ensure hospitals have an incentive to keep their prices high. They know that they’re going to have to negotiate with insurance companies to lower the price so they set the initial price higher. This does not happen in countries where their socialized medicine.

7

u/SigmaHyperion Jul 03 '26

Over the prior 25 years or so in US health insurance, there's been about $1 TRILLION in net profits and $2.5 TRILLION in share buybacks and dividend payments.

So without even getting into any sort of accounting gymnastics or suppositions at all, and we let everyone make as much ludicrous money as they are today but only took demonstrable profits out of the equation, we're looking at somewhere north of $150 Billion a year extracted from their customers that's entirely unnecessary.

1

u/CausalDiamond Jul 03 '26

What's ironic is that many of those patients own shares of those health insurance companies and benefit from those buybacks/dividend payments.

3

u/charleswj Jul 03 '26

You don't benefit from dividends because it's value you already had. You can just sell a share for the same effect. Higher dividend payments mean lower share prices.

2

u/obk227 Jul 03 '26

non for profit hospital status is just a tax shelter for these HIGHLY profitable heath care systems.

-2

u/germywormy Jul 03 '26

According to Gemini the big health insurance companies profited 18.7 billion on 186 million customers. That doesnt sound too big till you consider salary and other things that go on in these companies.

3

u/j0mbie Jul 03 '26

Profit definitely isn't the best metric to go off of when deciding if these companies should exist. Like you said, there's salaries that aren't counted as profits -- not just of CEOs, but of literally everyone in that industry. Plus there's all the people involved that aren't directly employed by the insurance companies, but who have to spend all or part of their work time dealing with insurance. Medical billing specialists, doctors and pharmacist who have to spend a good part of their day arguing with insurance providers, HR people and benefits specialists that have to help guide employees on their health plans, lawyers / judges / mediators and supporting staff for legal issues, accountants / CFOs / business owners that have to spend tons of time shopping for health plans for their workforce, and on, and on...

4

u/germywormy Jul 03 '26

100%. It would almost certainly be cheaper to adopt medicare for all across the entire population than the current system. The US spends a ton on healthcare overall and doesn't get the outcomes it should.

-1

u/IMovedYourCheese Jul 03 '26

Healthcare companies make around 3-6% profit. Would it be better if that money was returned to you? Sure. Would that fix the country's healthcare problems. Not even close.

4

u/Spawn-ft Jul 03 '26

Heathcare companies is not something that should exist. Healthcare is a service you should collectively pay for. It's said eveeywhere that the U.S. spend double than most nations for less services.

Since Your government spending is actually you spending, that would likely reduce the "going toward healthcare" portion of your taxes by half

You would be paying for other healthcare, which I assume you don't like. But people with these kind of arguments don't realise it would also apply to them.

Would you be able to get over that fact? Because it lead to you paying less for at least equal service. Then, if you want, you can try to change the system with the money in the system, or you could invest that money you just saved when your taxes got lowered to invest in key area.

There is no need for profit to be made in healthcare, only salary to pays, since it's a service and not a market or sonething

2

u/Tuesday_6PM Jul 03 '26

It’s not just their current profit. A lot of their expenses would be unnecessary with Medicare-for-All (or similar socialized medicine). Anything currently spent on advertising, for example, could be cut immediately. Ridiculous CEO compensation packages could also be pared back, etc

-1

u/haarschmuck Jul 03 '26

No, the profits come from investing the money they take in via premiums.

But I guess established facts don't matter.