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.
Industry Overview
The health insurance industry is essential to healthcare systems worldwide, acting as a financial intermediary to help individuals and organizations manage high healthcare costs. This industry includes both public and private entities, such as government programs like Medicare and Medicaid in the U.S., as well as private insurers like UnitedHealth Group, Anthem, and Aetna (now part of CVS Health).
Individuals can obtain health insurance through various methods: purchasing it independently, receiving it as part of an employer-sponsored group plan, or through a trade or professional association. When insurance is provided to a group, it is known as “group coverage” or “group insurance.” In this case, the organization that secures the insurance for the group is called the plan sponsor.
Health insurers offer a range of products, including individual and family plans, employer-sponsored group plans, Medicare Advantage, and supplemental insurance policies. These products differ in terms of coverage, cost, and provider networks.
Health insurance is subject to extensive regulation to ensure consumer protection, coverage standards, and financial stability. These regulations vary by country and region, affecting pricing, coverage requirements, and operational practices.
Key Health Insurance Industry Metrics
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:
- Premiums earned, Net - Health insurance
- Total benefit, loss, and expense - Health insurance
- Medical loss ratio (%)
- Total membership - Health insurance, Medicare advantage
- Total membership - Health insurance, Medicare supplement
- Total membership - Health insurance
- Per Member Per Month - Health insurance, Medicare
- Per Member Per Month - Health insurance, Medicaid
Health Insurance Business Model
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Expenses
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Revenue
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Profitability
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
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
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.
Available Comp Tables - Consensus Estimates
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.
Global Financial and Operating KPIs Company Examples:
North America
- UnitedHealth Group (NYSE: UNH)
- Elevance Health (NYSE: ELV)
- Centene Corp (NYSE: CNC)
- Humana (NYSE: HUM)
- Molina Healthcare (NYSE: MOH)
APAC
- NIB Holdings Limited (ASX: NHF)
LATAM
- Porto Seguro SA (BVMF: PSSA3)
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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