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Comment by cmiles74 | Hacker News Reader

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.

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Not sure I'm buying it tbh. I'm no fan of the American healthcare system, but we don't need to invent new accounting to make it look worse than it is.

Lots of businesses and industries have legal obligations to pay money for various things at various times, they don't treat that as pass through...it's revenue and expenses. Money is fungible.

I respectfully disagree. Should Stripe or VISA count all charges made with their network as revenue?

No - this is a false equivalence. Transaction processing companies for the most part handle the in-and-out flows as a single transaction. Insurance companies hold on to the premium pool ("float") for long enough that they have time to realize gains from investing portions of it - the inflow and outflow are very separate.

Should gas stations exclude the cost of the gas they're selling as revenue? There's probably a better argument to be made that they should be included than insurance companies be excluded. Unlike insurance companies, where the costs could come in randomly and over the span of months/years, the gasoline they're selling must be replaced (no randomness element) and is turned over in a matter of days. And if you think gasoline should be exempt because "it's not money", should precious metal or crypto traders get off the hook because those aren't money either?

Yes. Each industry has developed accounting standards that reflect the nature of their business. You couldn't run a bank or a payments company with a simple sales - COGS = gross profit model, it just wouldn't make sense.

In health insurance specifically, profitability is somewhat regulated and this gets at the accounting issue here. Insurance companies should maintain a medical loss ratio of 80-85% meaning that fraction of the premiums should be paid to providers. The remaining 15-20% is split between administrative costs and profit. Most of the article's forensic arguments around this are weak and circular and represent a misunderstanding of the accounting itself.

Neither Stripe or Visa count passthrough dollars as revenue. Nor should they.

That's not a good analogy. Stripe and Visa don't deposit the money in their account and hold on to it, it literally goes directly from the payer to the payee, they just facilitate the technical movement

Insurance money goes from the insured, into the insurance company's bank account, and IF the insured customers need services, it's then paid to service providers. If not, it sits in the insurance company's bank account as profit

Considering insurance premiums that are later paid as insurance claims as not being revenue is absolutely bonkers and there's a reason that's now how the accounting actually works

No, they're collecting money specifically on behalf of a 3rd party and then giving it directly to that 3rd party. They are custodians of that money only, it never even hits their bank account (goes into a dedicated trust account before distribution), and they cannot legally keep it. THAT is an actual passthrough.

This is addressed in the first paragraph of the pdf, with comparisons drawn to other industries and financial instruments where such income is not considered revenue. One can of course disagree whether it should be accounted this way, but the concept is not outlandish.

“This measure, while a standard accounting metric, obscures the strong financial performance of financial intermediaries such as health insurance companies, whose revenues are mostly pass-through payments between insured individuals and their health service providers. […]”

It seems to me that this document is almost entirely an argument for changing the accounting rules because of this distortion.

Seems to me that the argument is really "are my premiums a passthrough to medical providers" and I have a really hard time answering Yes to that.

If they are, then what do we call it when my medical expenses surpass my premiums? Negative passthrough? Contra passthrough?

What do we call it when I pay premiums for a year, never use a dime of it, and then cancel my insurance? I don't get that money back, nor does it get passed through to medical providers.

Do life insurance companies consider my premiums to be a passthrough to my eventual benefit payment or do they count them as revenue?

> if I…pay UHG $18,000 and… UHG pays out $2,500…, only the remaining $15,500 should be counted as UHG revenue

To illustrate the problem with this, what would you calculate their revenue to be if you become severely ill and they pay out $100,000?

There is no such concept in accounting as negative gross revenue. And situations where net revenue goes negative are exceedingly rare and complex (you’d probably hear about it in the news and someone might end up in jail).

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