What Do We Get for the Cut Health Insurers Take?
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Insurers take a cut of every premium dollar for overhead and profit. The question isn’t just whether they profit, but also whether we’re getting value in return.
KFF’s Larry Levitt breaks down how much goes to administrative costs and profit and how that varies across private insurance markets and Medicare, and considers what a Medicare-for-all system, which would be operated by the government, would address and what might be left unresolved.
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Video Transcript
Narrated by Larry Levitt, KFF Executive Vice President for Health Policy
Insurers take a cut of every premium dollar. The question isn’t whether they profit, it’s what value we’re getting in return.
Insurers siphon off premium dollars for overhead and profit, averaging annually $846 per enrollee in the employer market, $987 in the individual insurance market, and $1,655 in Medicare Advantage.
Setting aside administrative costs, profit margins of health insurers are on paper generally modest. Typically, no more than a few percent of premium revenues. But a few percentages of a very large number is still a very large number.
The seven largest publicly-held health insurance companies pulled in an estimated $71 billion in profits in 2024, including subsidiaries, like pharmacy benefit managers.
How that money flows looks different depending on the program.
In Medicare Advantage – the private insurance option now covering over half of beneficiaries – about 90 cents of every premium dollar goes toward health care, while the remaining 10 cents goes to overhead and profit.
By contrast, less than two cents of every Medicare dollar goes to administering traditional Medicare. And as a public program, there is no profit.
The difference? Traditional Medicare is administered by the government rather than private insurance companies.
And in traditional Medicare the government sets prices for hospitals and doctors directly rather than negotiating them through private insurers.
Taking health insurance companies out of the equation – for example, under a Medicare for All system operated by the government – would reduce administrative costs and profits. But the biggest drivers of health spending growth – hospital prices, care that is not always grounded in evidence, and new drugs and medical technologies – would remain and have to be dealt with somehow.
We started by asking what value insurers provide for their cut. But the real question may be, who do we trust to decide what health care gets covered and how much gets paid?
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