But that investment doesn't matter if they're limited to a 20% "profit" to cover overhead, salaries, and as a carry over for future expenses.
They would essentially have to return that "investment" to the buyers until what they have left is that 20% of total revenue...and then apply that 20% to operations.
I don't think that's how it works.
Rather, I think how it works is that only a max of 20%
of the premiums paid can be used to pay administrative fees.
Let's say that a health insurance company takes in $100 million in premiums from their customers in a single year.
They invest
all that money in various ways that year and get a 5% return of their investments that year. So off of investments they will get $5 million in profits that year.
Of the $100 million paid in from premiums, they must pay out
at least $80 million to health coverage costs and
at most $20 million for administrative costs.
But they have that extra $5 million that they profited from through investments. Which they can then use however they want, such as to pay overhead, to pay salaries or compensation, to pay out more in coverage, pay in administrative costs, or invest it further to get a greater returns from it.
One thing you have to keep in mind is that large institutions rarely keep cash reserves handy. Individuals tend to take their paycheck, deposit it in a bank, and just let it sit until they need it.
Big businesses or individuals with large amounts of wealth don't do that. Every dollar that they sit on "just in case" is one dollar that they aren't investing. Which means it's another dollar that isn't getting a return for them. Which is a greater loss to them.
That's why the credit crunch was so bad for businesses, even large ones. What businesses like to do is instead of have a cash reserve they do payroll via credit and then cash out their investments to pay it back, especially if the percentage of return they get from their investments is at a larger rate than the percentage they have to pay on borrowing the money on credit.
That's also why large banks are resisting regulations requiring reserves on their capital. The more money they need to keep on hand for emergencies is less money they can lend to borrowers, which is less loans they are lending to get rates of return on.
So health insurance companies, who basically profit via investments, will hold on to their money to ensure longer times it's used in investments to get greater returns until they absolutely have to pay out money for health coverage.
Also keep in mind that this will help health insurance companies cut costs such as advertising. Because of the mandate, rather than advertising to convince people to get health insurance at all, companies will now have to advertise on the quality of the insurance they provide. And now that everybody is required to get health insurance, they are going to have a metric
****load of customers to them paying premiums to them. Which means a greater absolute amount of money the individual health insurance companies will take in.
The reason for the cap is to ensure that executives don't keep increasing their salaries to ungodly levels now that every American is required to be a customer of theirs. Trust me - the health insurance companies won't be hurt by this legislation at all.
Not even Halliburton got a deal this cushy.