I'm not an accountant and don't claim to have a clean answer to how it should be accounted, but I hope I can highlight the conundrum.
Suppose you run a brokerage or some kind of marketplace enabling transactions. Should all transactions passing through your platform be considered your revenue? Or only the part that stays with you for the services you provide, while deducting the component which is simultaneously directed to the transaction counterparty?
In one simple perspective, calling these revenue and inventory would make sense only in a world where you hold on to the cash and the goods for extended periods, so they need to be appropriately accounted for in your books among cash flows and balances.
So what should be the correct accounting model for an insurance service that collects premiums and holds on to your money and pays later for services once you avail them?
I imagine that so long as they are taking on the risk of how much service you might avail rather than simply putting a stop at how much you've paid them in advance, then the premiums they collect ought to be considered revenue, to balance against the as yet unknown inventory costs.
All of this might be relevant in a conversation between accountants or investment analysts, but it's pretty obvious the "study" chose this particular methodology to get a number that makes insurance companies look as bad as possible. In this context, using their methodology does more to obfuscate/mislead than to clarify. If you say that UHI has a profit margin of 15%, most people would interpret that to mean that per $1000 worth of premiums paid, they make $150, which is exactly what happens. Their argument of "they charge $1000 in premiums, but of that $800 is paid out as costs, therefore their margin is 75%" is more confusing.
You're just asserting common convention among some implicitly selected audience that you consider "most" people, rather than justifying why that is the most reasonable practice.
Not that I consider it unreasonable (as I explained above).
Most people (in the populace) are unfortunately not numerate enough to have a thoughtful opinion on how it ought to be accounted, and are irrelevant to this discussion.
You're just asserting common convention among some implicitly selected audience that you consider "most" people, rather than justifying why that is the most reasonable practice.
The purpose of language is communication, so if "most" people (which I mean to be laypeople off the street, which is the presumptive audience for this report) understand what it means, then it's mission accomplished. On the flip side, if the language used is deceptive/misleading, even if the underlying principle is sound, that's bad. The "most reasonable practice" question is unhelpful because it quickly devolves into questions on how society ought to work, which is subjective and no objective statements can be made about it. For instance, why even argue what the "profit" margin is? Should private entities even be making money on healthcare? Why not put out a "study" on how much unitedhealth is "stealing" from people instead? After all, the position that for profit companies shouldn't be involved in the provision of healthcare isn't exactly an uncommon position.
Comments
I'm not an accountant and don't claim to have a clean answer to how it should be accounted, but I hope I can highlight the conundrum.
Suppose you run a brokerage or some kind of marketplace enabling transactions. Should all transactions passing through your platform be considered your revenue? Or only the part that stays with you for the services you provide, while deducting the component which is simultaneously directed to the transaction counterparty?
In one simple perspective, calling these revenue and inventory would make sense only in a world where you hold on to the cash and the goods for extended periods, so they need to be appropriately accounted for in your books among cash flows and balances.
So what should be the correct accounting model for an insurance service that collects premiums and holds on to your money and pays later for services once you avail them?
I imagine that so long as they are taking on the risk of how much service you might avail rather than simply putting a stop at how much you've paid them in advance, then the premiums they collect ought to be considered revenue, to balance against the as yet unknown inventory costs.
All of this might be relevant in a conversation between accountants or investment analysts, but it's pretty obvious the "study" chose this particular methodology to get a number that makes insurance companies look as bad as possible. In this context, using their methodology does more to obfuscate/mislead than to clarify. If you say that UHI has a profit margin of 15%, most people would interpret that to mean that per $1000 worth of premiums paid, they make $150, which is exactly what happens. Their argument of "they charge $1000 in premiums, but of that $800 is paid out as costs, therefore their margin is 75%" is more confusing.
You're just asserting common convention among some implicitly selected audience that you consider "most" people, rather than justifying why that is the most reasonable practice.
Not that I consider it unreasonable (as I explained above).
Most people (in the populace) are unfortunately not numerate enough to have a thoughtful opinion on how it ought to be accounted, and are irrelevant to this discussion.
The purpose of language is communication, so if "most" people (which I mean to be laypeople off the street, which is the presumptive audience for this report) understand what it means, then it's mission accomplished. On the flip side, if the language used is deceptive/misleading, even if the underlying principle is sound, that's bad. The "most reasonable practice" question is unhelpful because it quickly devolves into questions on how society ought to work, which is subjective and no objective statements can be made about it. For instance, why even argue what the "profit" margin is? Should private entities even be making money on healthcare? Why not put out a "study" on how much unitedhealth is "stealing" from people instead? After all, the position that for profit companies shouldn't be involved in the provision of healthcare isn't exactly an uncommon position.