The healthcare reform laws included a medical loss ratio (MLR) provision, that says health insurers must spend 85% of the premiums they collect on medical care (for large group plans) or 80% (for individual or small group plans). The idea is to limit insurance companies' incentive to increase their profits by denying claims or curtailing coverage.
The required MLRs don't seem so drastic overall. In 2009, the large insurers had a MLR of about 74% for individual policies, 81% for small group policies, and 85% for large group policies. However, the law requires these MLRs for each division of the insurer. Most insurers have some divisions that have very low MLRs (are very profitable) - those will run afoul of the law.
The regulations for this law are being prepared now. Insurance companies are trying to re-classify more expenses as medical care - like fraud investigation, converting to new diagnostic codes, new computer systems, wellness incentives, patient education, etc. The final regulations may or may not permit some of this.
Health insurance is a big business. The 6 largest publicly traded health insurers collected $86.4BN of premiums in 2009, and paid $71.5BN of claims, meaning they made $14.5BN of operating profit. That doesn't include all the private insurers and smaller publicly traded insurers.
http://www.pnhp.org/sites/default/files/docs/2010/MLR-Report.pdf
Health insurance is an inefficient aspect of our healthcare system. Here's some back-of-envelope math I read:
- Let's suppose health insurance is the most efficient way to administer healthcare. So let's replace Medicare, Medicaid, VA, etc with that nice efficient health insurance. Total US healthcare spending is $2.4TN. Based on the health insurance industry's average MLR or roughly 80%, the country would be spending $480BN on just the administration of healthcare benefits. That's close to the peacetime defense budget.
That doesn't include the money that the healthcare providers spend on the other side, to deal with the health insurance companies.
Interestingly, health insurance companies generate much of what you read and think about healthcare issues, because they fund much (most?) of the advertising, commentary, and op-ed on the issue. Including the famous "Harry and Louise" ads of the Clinton years. Some of this advertising is attributed to the industry, but much of it is funneled through misleadingly-named organizations.