alt Hacker News> Conventional accounting measures portray large health insurers such as UnitedHealth Group (UHG) as earning relatively low profit margins because they treat premium dollars that are subsequently paid out in medical claims as revenue. However, these medical claims are pass-through costs, not income retained by the insurer.
I don't understand this claim. Doesn't every business have costs to make its goods and services, and revenue when those are sold? A grocery store sells food and uses the money to buy more food, pay its employees, reinvest etc, and the profit leftover goes to the owners. An insurance company sells policies and similarly uses the money to pay claims, pay employees, reinvest, and profit. Why is the insurance company's sales revenue pass-through and the grocery store's sales revenue not?
Update: the replies so far all seem very superficial. Yes, I know that insurance is not exactly the same as grocery stores. This does not explain why they should suddenly be treated differently from an accounting perspective despite what everyone else before this moment has done.
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An intuitive explanation is that financial products are, approximately, buying and selling as part of the same transaction. You can't separate the "selling premiums" part from the "paying out claims" part.
This is true of life insurance, investment firms, and banks. It's also true of marketplaces that connect buyers and sellers, like Etsy.
Groceries stores are buying from suppliers and selling to consumers, but those are separate operations. If the consumers opt out, the grocery stores (temporarily) still have a full and complete obligation to their suppliers. It's hard to sell to customers without supply, but if you try hard, you could theoretically do that as well.
Somebody with a better financial background might be able to define the nuances of accounting practices here, but there's already a pretty meaningful line that's established. It is kind of weird that health insurance doesn't behave like a financial product.
I'm not an accountant and don't claim to have a clean answer to how it should be accounted, but I hope I can highlight the conundrum.
Suppose you run a brokerage or some kind of marketplace enabling transactions. Should all transactions passing through your platform be considered your revenue? Or only the part that stays with you for the services you provide, while deducting the component which is simultaneously directed to the transaction counterparty?
In one simple perspective, calling these revenue and inventory would make sense only in a world where you hold on to the cash and the goods for extended periods, so they need to be appropriately accounted for in your books among cash flows and balances.
So what should be the correct accounting model for an insurance service that collects premiums and holds on to your money and pays later for services once you avail them?
I imagine that so long as they are taking on the risk of how much service you might avail rather than simply putting a stop at how much you've paid them in advance, then the premiums they collect ought to be considered revenue, to balance against the as yet unknown inventory costs.
Insurance companies often have a parent company. That parent company owns healthcare providers and pharmacies.
So it goes something like this
United Health Group -> United Health Insurance United Health Group -> Sunshine Hospital.
United Health Insurance has a profit cap, it’s a % of revenue. Sunshine Hospital has no cap. So Sunshine Hospital charged United Health Insurance X$ and that profit rolls up to United Health Group.
I just scanned the doc but I think your question is the core argument of the doc. It explicitly says that United is using standard accounting practices and proposes the “pass through” mechanism as a “better” metric.
Based on the source I, personally, don’t find it to be a credible argument
I believe they are saying that only the portion of premiums paid by UHG customers _that are not_ spent on paying out claims should be counted as UHG revenue. That is if I and my employer pay UHG $18,000 over the course of the year and UHG pays out $2,500 to my doctors and to cover my prescriptions, only the remaining $15,500 should be counted as UHG revenue.
The thinking here is that because UHG is legally obligated to pay out claims, this money only "passes through" their hands. I believe the legal obligation is the thing here.
Anyway, if these pass through costs (the claims they are legally obligated to pay) are removed from the equation then their revenue number is smaller and their profit margin is larger.