Investing in Health Insurance Companies – What Is Involved?

Health insurance companies are perhaps the most influential aspect of today’s healthcare system. It is your insurance company that determines what doctors you can see, how much money you will pay them, and what percentage hospitals and doctors will receive. Because of these influences, the health industry is the only business where consumers have no active part in making any decisions, and the provider’s opinion about how much they should make is not taken into account. In this way, health insurers have gained complete control of the equation of healthcare. From an investor standpoint, it does not get much better than investing in these insurance companies.

Since there are different product offerings from various insurance companies, you must assess the investment potential of different companies. Fortunately, there are specific financial ratios that are easily comparable between companies. If you want to focus on private company customers, there are two main streams of revenue which come from the ASO and full-service categories. The ASO business is steady, but slow, a process where a flat fee is paid based on agreements in a contract. While contracts may have minor stipulations that affect the income of investing in these insurance companies, it can still be a profitable investment, even if the margins are not sky-high.

Government customers are slightly different, with revenue being generated predominantly in the full-service category. If you are planning on investing in these companies, you need to understand a few financial margins to determine the financial strength of one company over another. The most important ratio is the medical cost ratio, or MCO. This number tells an investor what percentage of the premiums are medical expenses. The calculation is made by taking medical expenses divided by premiums. You will be looking for a low medical cost ratio.

There are a few potential hazards when investing in the said companies. For example, in the past few years, many of these companies have branched off to include other kinds of services. Because of this, much of the financial results you make your calculations from are unrelated to the health insurance portion of their business. Also, these companies invest their customers’ premiums in different markets to gain an investment income. If the market falls, companies who lose money from their investments could impact your own personal profitability. The bottom line, however, is that these insurance companies are generally recession-proof. This could be a great place to invest and make a profit.