Where Does Your Health Insurance Dollar Go?
Some of you may recall a business report few years back (the Hewitt Health Value Initiative) that cited the ongoing rise in the annual healthcare cost per employee on a national average between 2005 and 2012. We all know that the cost of health care, and as a result, health insurance, has been rising steadily over the years. Especially with the advent of healthcare reform, there seems to be no slowing of the cost of care and coverage.
Which begs the question: each month when you make your premium (or it’s taken from your paycheck), Where does that health insurance dollar go?
Take a look at this illustration from the American Health Insurance Plans, an independent nonprofit association of health insurers (www.AHIP.org).
This image is a few years old, but it’s still highly relevant and accurate. What it says is over the lifetime of an insured person, this is how their health insurance dollar is distributed. Any individual year might be higher or lower than this, but what is revealed here is that over your lifetime, 87 cents of every dollar you send to the insurance company is actually paid out to drug companies and healthcare providers.
The remaining 13 cents? As you can see, that stays with the insurance company to enable them to pay for claims processing, compliance procedures, and government payments. It also helps pay for marketing, and commissions to agents and brokers.
Given the size of these insurers, 13 cents is not a lot to cover all of those costs, with no more than three cents of that to be leftover as net profit. That might sound like a really low number. When compared to the total dollar, it is a small amount. However, the insurance companies have hundreds of millions of insurers paying hundreds of dollars a month a piece, it adds up quickly, it like the utility companies.
It’s a lot of money. The insurance companies have ownership of creating efficiencies and policies that help contribute to the solution…and not continue to be part of the problem. Indeed their survival depends upon it.
That’s not to say that there isn’t room for improvement from the insurance companies, as we move forward. But as you can see from this illustration, the insurance industry really represents only 13 cents of problem. In Washington we seem to spend 87 percent of the conversation talking about 13 cents of the problem. The point is that how we access and utilize our care is probably more important than the specifics as it relates to the insurance industry. So all of it needs to come together for a comprehensive solution, but this dollar bill reflects there is a lot of work to be done on the blue side of the dollar bill not just the yellow.
Moving forward with health reform, another important question is: How we are going to pay for it? A few answers to that question:
There will be 0.9% additional Medicare tax on earned income starting in 2013. This will be due on earned income in excess of $200,000 for single tax payers or $250,000 for married couples filing jointly, or $125,000 for married filing separately.
There is also a 3.8% Medicare tax on unearned income. That is important…what is unearned income? Right now, if I have a $10,000 mutual fund and it grows by $1,000 and I have not sold it, I am still holding that fund, and I have $1,000 of unearned income. Starting in 2013, if I break these thresholds for compensation, I would pay an extra 3.8% on that unearned income. Investment properties are another example of unearned income. You might have a $100,000 apartment building, and if that goes up to $140,000 in value, that $40,000 could be unearned income. So even before you have enjoyed the property, you have taken the gain, it can be accounted as unearned income and you would be assessed a 3.8% tax.
Now, if that holding loses money or if the economy changes, if it relates to your cost basis for that holding, you will have a reversing transaction on a future tax return. But at the time when it is unearned, it will be taxed 3.8%. It is complicated, there are a lot of moving parts and if you are over these thresholds for compensation, consult your tax professional.
At MyhealthQuoter.com, we are here to guide you and help you get informed and make the right decisions, and we will continue to do so in the advent of healthcare reform and as these different choices become available.
Matthew Byrne has made a career helping people find affordable health insurance in Ohio. He is the founder of MyHealthQuoter.com, a Dublin-based brokerage providing Ohio health insurance quotes and services for individuals, families and corporations. Mr. Byrne is a subject matter expert speaking frequently about Health Care Reform, Defined Contribution Programs, COBRA, and Medicare. He can be reached at (614) 336-3636, and online at www.MyHealthQuoter.com.
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