The health insurance business model is not complicated once you see it plainly. Insurers collect premiums from individuals and employers, pay out some fraction of those premiums as claims, and retain the remainder. The less they pay out in claims, the more they keep. That basic incentive — minimize claims, maximize retained premiums — drives almost every structural feature of the insurance industry that patients find confusing, frustrating, or harmful.
This article documents the mechanics of that model: where the money comes from, how premium growth has outpaced claims growth, how benefit design is used as a financial tool, and what executive compensation and shareholder returns look like when the numbers are made concrete.
The Basic Financial Model
Health insurance revenue begins with the premium — the monthly payment made by an individual or employer for coverage. Premiums are set annually through an actuarial process in which insurers estimate the expected cost of claims for the covered population and add a margin for administrative costs and profit. The premium base is not capped by federal law. The ACA established minimum loss ratio requirements — constraints on how little of the premium can go to claims — but placed no ceiling on the premium itself.
The medical loss ratio is the ratio of claims paid to premiums collected. Federal law requires large-group insurers to maintain an MLR of at least 85 percent — meaning at least 85 cents of every premium dollar must go to claims and qualified quality improvement activities. Small-group and individual market plans must maintain at least 80 percent. Insurers that fall below these thresholds must issue rebates to policyholders.
In practice the MLR floor functions as an operational ceiling. The largest insurers consistently report MLRs at or slightly above the regulatory minimum, extracting the maximum permissible margin on a premium base they control the pricing of. The structure rewards premium growth: a 15 percent margin on a $20,000 family premium is twice the dollar return of a 15 percent margin on a $10,000 family premium, with no change in the ratio reported to regulators.
Average annual premiums for employer-sponsored family coverage increased from $13,375 in 2009 to $23,968 in 2023, according to the Kaiser Family Foundation’s annual employer health benefits survey — a 79 percent increase over fourteen years. Cumulative general inflation over the same period was approximately 46 percent. The premium base grew faster than inflation, faster than wages, and faster than the underlying cost of providing care. The margin percentage stayed roughly constant. The dollar extraction grew substantially.
Premium Growth vs. Claims Growth
The gap between premium growth and claims growth is where the financial story of the insurance industry becomes most legible.
A 2022 analysis by the Health Care Cost Institute found that insurer revenues from premiums grew at roughly 1.5 to 2 percentage points faster annually than claims paid over the prior decade. That gap compounds. At two percentage points per year over ten years, the retained margin as a share of total revenue increases meaningfully even with a nominally stable MLR — because the premium base on which the margin is calculated is consistently larger than the claims base it is supposed to mirror.
The industry’s defense of this gap is that administrative costs and quality improvement investments — both allowable under the MLR calculation — absorb a significant share of the retained margin. What that defense does not explain is the growth in executive compensation and shareholder returns over the same period, which are not quality improvement investments and are drawn from the same retained margin.
Benefit Design as a Financial Tool
The retained margin is not the only mechanism through which insurers manage profitability. Benefit design — the structure of deductibles, coinsurance rates, copayments, out-of-pocket maximums, and formulary tiers — shifts cost directly to patients, reducing insurer claims liability without reducing premium revenue.
A plan with a $5,000 individual deductible collects the same premium as a plan with a $500 deductible for the same covered population. The insurer’s claims liability begins only after the deductible is exhausted. In a population where many members do not reach their deductible in a given year — which is typical in a healthy working-age population — the high-deductible plan produces meaningfully lower claims costs at the same or similar premium levels.
This is not incidental. It is the explicit actuarial rationale for high-deductible health plan design. The growth of HDHPs over the past two decades tracks the period of most significant insurer profitability growth. In 2006, fewer than 10 percent of covered workers were enrolled in a high-deductible plan. By 2023, that figure exceeded 50 percent, according to KFF data. Average deductibles over the same period roughly tripled in real terms.
The clinical consequences of that design — patients deferring necessary care because of cost exposure below the deductible — are documented in the companion article, Designed to Discourage. The financial consequence for insurers is straightforward: deferred care is a deferred claim, and a deferred claim is retained margin.
Executive Compensation
The compensation paid to executives at the major health insurers is not consistent with the compensation structures of regulated utilities or nonprofit service organizations. It is consistent with the compensation structures of highly profitable financial intermediaries — which is what these companies are.
In 2023, Andrew Witty, CEO of UnitedHealth Group, received total compensation of $23.2 million, according to the company’s proxy statement filed with the SEC. David Cordani, CEO of Cigna, received $21.4 million. Gail Boudreaux, CEO of Elevance Health, received $18.6 million. Karen Lynch, CEO of CVS Health, received $21.3 million. The four CEOs of the dominant commercial insurers collectively received approximately $84.5 million in 2023 — drawn from the same retained premium margin that comes from the premiums paid by covered individuals and employers.
These are not the compensation structures of a regulated utility providing an essential service under constrained margins. They are the returns on a profit-extraction business operating at the center of American healthcare, structured to maximize retained premium revenue and rewarding its senior executives accordingly.
Compensation at this level is not confined to CEOs. Chief financial officers, chief operating officers, and senior vice presidents at the major carriers routinely receive total compensation packages in the $5 million to $15 million range, according to proxy disclosures. The senior management layer at UnitedHealth Group, Cigna, Elevance, and CVS/Aetna collectively receives hundreds of millions of dollars annually — all drawn from the premium margin that federal law allows insurers to retain above their MLR floor.
Shareholder Returns
The major health insurers have generated substantial shareholder returns over the past decade through a combination of stock price appreciation, dividend payments, and share buyback programs. Buybacks in particular function as a direct transfer of retained premium margin to shareholders: the company purchases its own shares on the open market, reducing share count, increasing earnings per share, and returning capital to investors without the tax implications of a dividend.
UnitedHealth Group returned approximately $15 billion to shareholders through buybacks and dividends in 2023 alone. Cigna returned approximately $9 billion. CVS Health returned approximately $3 billion despite carrying significant debt from the Aetna acquisition. Elevance returned approximately $3.5 billion.
These figures represent capital that was collected as premium revenue, not paid out as claims, retained as the allowable margin above the MLR floor, and distributed to shareholders rather than reinvested in coverage improvements or premium reductions. The MLR framework permits this: once the minimum claims percentage is satisfied, the disposition of the remaining margin is at the company’s discretion.
What the MLR Calculation Obscures
The medical loss ratio is a real constraint and the ACA’s establishment of it was a meaningful reform. But the MLR calculation obscures as much as it reveals.
Administrative costs that qualify as allowable under the MLR calculation include a broad range of expenses that are not directly related to the delivery of care: claims processing infrastructure, utilization management systems — including prior authorization and denial management operations — information technology, and regulatory compliance. These are legitimate business costs, but they are also the costs of operating a system that imposes significant administrative burden on providers and patients. The insurer’s MLR-compliant administrative spending and the provider’s administrative burden from dealing with that system are two sides of the same transaction — one counted as a cost of doing business, the other borne by the healthcare system at large.
The administrative burden imposed on providers — the physician hours spent on prior authorization, the billing staff required to manage claims and denials, the infrastructure of appeals and coding — is documented in The Administrative Burden and What It Costs. That cost does not appear in the insurer’s MLR calculation. It is externalized onto the rest of the healthcare system while the insurer reports a compliant ratio.
Health Insurance Hub
00 — Hub: Health Insurance Industry
01 — How the Health Insurance Industry Works — and Who It Works For
02 — How Health Insurers Make Money
03 — Designed to Discourage: How Benefit Structures Reduce Claims
04 — The Denial System: How Insurers Decide What Not to Pay
05 — Prior Authorization: What Patients Experience
06 — The Administrative Burden and What It Costs
07 — Narrow Networks and What They Cost You
08 — The Employer-Sponsored Insurance Trap
09 — The Broker and Consultant Layer
10 — Billed for Diseases They Never Treated: How Medicare Advantage Fraud Works
11 — What Single-Payer Resolves: The Evidence From This Hub
12 — Health Care Forum: Join the conversation here
This article was researched and drafted with AI assistance under human review. See our full AI and editorial practices.