Insurance Float Explained: What is it? Impact on Health Insurance?

This video provides an in-depth exploration of "insurance float" and its specific implications for the health insurance sector. Dr. Eric Bricker, the speaker, begins by defining insurance float as the money an insurance company holds between receiving premium payments and paying out claims, which they then strategically invest to generate additional income. He establishes that this investment income, alongside underwriting profit (premiums minus claims and operational expenses), constitutes the two primary sources of an insurer's profitability, citing Warren Buffett's Berkshire Hathaway as a prime example of leveraging float for substantial returns.

The presentation meticulously details how the volume of float and its contribution to overall profit vary significantly across different insurance types. For Property and Casualty (P&C) insurance, float can be 1 to 2.5 times total premiums, accounting for approximately 70% of total profit. Life insurance exhibits even higher float, ranging from 4 to 10 times premiums, contributing a remarkable 90% to its profit. In stark contrast, health insurance maintains a much smaller float, typically only 0.1 to 0.3 times its premiums, primarily due to faster claim payouts. Consequently, only about 20% of health insurance companies' profit stems from investment income generated by float, with the overwhelming majority (80%) derived from underwriting profit, heavily influenced by factors such as the medical loss ratio.

Dr. Bricker then draws a crucial connection between insurance float and healthcare providers' accounts receivable (AR). He clarifies that the float held by health insurance carriers directly corresponds to the unpaid accounts receivable of doctors and hospitals. To maximize their float and the resulting investment income, health insurance companies intentionally delay reimbursement to healthcare providers. He quantifies this impact, illustrating that a typical 250-bed hospital can have approximately $113 million in AR tied up in insurance float, translating into millions of dollars in annual investment income for insurers. Through examples of major hospital systems like HCA, Common Spirit, and Mass General Brigham, he demonstrates that billions of dollars in provider AR are held as float, yielding hundreds of millions in annual investment revenue for the insurance industry. The speaker concludes with a critical insight: the persistent average of 47 AR days for hospitals, unchanged for decades, is not a technological problem solvable by AI, but rather a deliberate and entrenched business strategy by health insurance companies to maximize profit, viewing float as an intentional "feature" rather than an operational "bug."

Key Takeaways:

• Understanding Insurance Float: Insurance float is the capital an insurance company holds between receiving premiums and paying claims, which is then invested to generate additional income, forming a significant component of an insurer's overall profitability.
• Dual Profit Sources: Insurance companies derive profit from two main avenues: investment income generated from their float and underwriting profit, which is the surplus remaining after paying claims and operational expenses from collected premiums.
• Varying Float Impact by Insurance Type: The magnitude of float and its contribution to profit differ substantially. Property & Casualty (P&C) insurance has float 1-2.5x premiums (70% of profit from float), Life insurance has 4-10x premiums (90% of profit from float), while Health insurance has a much smaller float of 0.1-0.3x premiums, contributing only about 20% to its total profit.
• Health Insurance Profit Drivers: For health insurance companies, the majority of their profit (approximately 80%) comes from underwriting, making factors like the medical loss ratio and claims management critically important to their financial performance.
• Float as Provider Accounts Receivable: From the perspective of healthcare providers (doctors, hospitals), the insurance float held by carriers represents their accounts receivable (AR). This means that money owed to providers is actively being used by insurers for investment.
• Intentional Delay of Reimbursement: Health insurance companies strategically delay reimbursement to healthcare providers to maximize their float. This is not an operational inefficiency but a deliberate business strategy to increase investment income.
• Significant Financial Impact on Providers: The amount of money tied up in insurance float (provider AR) is substantial. A typical 250-bed hospital can have over $100 million in AR, generating millions in annual investment revenue for insurers from that single entity's unpaid claims.
• Large Scale Financial Implications: Major hospital systems like HCA, Common Spirit, and Mass General Brigham have billions of dollars in accounts receivable, which translates into hundreds of millions of dollars in annual investment income for the insurance industry from their float alone.
• AI's Limited Role in AR Reduction: The speaker argues that new technologies, including AI, are unlikely to significantly reduce healthcare provider accounts receivable days. This is because delayed payment is not a technological problem but an intentional, profit-maximizing strategy by health insurance companies.
• Persistent AR Days: The average accounts receivable days for hospitals has remained consistently around 47 days for decades (since 1998), indicating the entrenched nature of this financial dynamic and the unlikelihood of it changing without fundamental shifts in incentives.
• Float as a "Feature," Not a "Bug": The video emphasizes that high accounts receivable and insurance float are considered a "feature" by health insurance companies, serving as a reliable and significant source of investment income, rather than an operational "bug" to be fixed.

Key Concepts:

• Insurance Float: The amount of money an insurance company holds between receiving premium payments and paying out claims, which it invests to earn a return.
• Underwriting Profit: The profit an insurance company makes from its core business of selling insurance policies, calculated as premiums collected minus claims paid out and operational expenses (e.g., commissions, payroll).
• Medical Loss Ratio (MLR): A regulatory requirement (especially in the U.S.) that mandates health insurance companies spend a certain percentage (e.g., 85%) of their premium revenue on medical care and quality improvement, rather than administrative costs or profits.
• Accounts Receivable (AR): Money owed to a business (in this context, healthcare providers) for goods or services delivered but not yet paid for. For providers, this is the money tied up in insurance float.
• AR Days: A metric measuring the average number of days it takes for a business to collect payment after a sale or service. In healthcare, it indicates how long it takes for insurers to reimburse providers.

Examples/Case Studies:

• Berkshire Hathaway/Warren Buffett: Cited as the "poster child for float," demonstrating how significant investment income can be generated from holding large amounts of float.
• Typical 250-Bed Hospital: Generates about $2.4 million in bills daily and has approximately $113 million in accounts receivable (at 47 AR days), which translates to $4.5 million in annual investment revenue for insurers.
• Hospital Corporation of America (HCA): Estimated to have about $8.4 billion in accounts receivable, generating roughly $336 million annually in investment revenue for the insurance industry.
• Common Spirit: Estimated to have about $4.4 billion in accounts receivable, generating approximately $177 million annually in investment revenue for the insurance industry.
• Mass General Brigham (MGB): Estimated to have about $2.7 billion in accounts receivable, generating around $106 million annually in investment revenue for the insurance industry.