What is the contribution margin in a health plan?

The contribution margin in a health plan is correctly defined as the difference between premiums and medical expenses. This concept plays a crucial role in understanding a health plan’s financial viability since it represents the revenue that remains after the costs associated with delivering medical services are subtracted from the income generated by premiums.

In this context, premiums represent the income from policyholders, while medical expenses include costs associated with healthcare services provided to members. A positive contribution margin indicates that a health plan is not only covering its medical expenses but also generating profit that can be used to cover indirect costs, invest in member services, or enhance operational capabilities.

While the other options include relevant financial concepts, they do not accurately define the contribution margin as it pertains specifically to health plans. For example, the option discussing the difference between direct and indirect costs relates to broader cost analysis rather than the specific assessment of revenue remaining after medical expenses. Similarly, the sum of all costs incurred focuses on total expenses without addressing revenue generation, and the revenue generated from new memberships does not account for associated costs like medical claims, which are critical for determining whether the health plan is financially sustainable.