Excessive Health Care Profits

In the health care reform debate, we often hear about how huge amounts of money that could be going to provide people with treatment is being sucked up by insurance company profits instead. This kind of thing always makes me wonder, since in my experience a competitive market place will usually drive profit margins down pretty low. So I thought it would be illustrative to look up how much money the top private insurance companies make, and then determine their profit margins and profits per enrollee.

The following information is publicly available on Google Finance. Revenue figures are annual ones for the year ending 12-31-2008. The total revenue, income before tax and income after tax figures come directly from each companies public financial reports. The enrollee figures are potentially slightly more approximate, since there I googled for the most recent press release which showed total enrollment for each company.

health_care_finances

health_care_profits
It struck me as interesting that it was Humana, with the lowest profits per enrollee in 2008, which just posted a healthy profit increase for Q2. Wellpoint and Aetna have suffered membership declines in the last quarter.

In no case is the company making more than $100 per enrollee per year in profits. Given that most insurance plans cost a good $4000-$6000 per year, the amount of what we pay for insurance that goes to “lining insurance companies’ pockets” would seem to be fairly small.

65 Responses to Excessive Health Care Profits

  • Heh. Touche, Phillip.

    I’d be interesting to know what this says about some of the standard complaints about private health insurance costs. For instance, there are a lot of complaints about insurance companies denying coverage to people with known conditions, dropping people who are sick, refusing to cover certain things, etc. But if all that is going on, and profits are slim, and private insurance prices are rising faster than Medicare/Medicaid, that basically suggests these tactics are either minimal in their impact (perhaps something that happens so little that there’s not much measurable impact) or else that without those tactics things costs to people seeking insurance would be even higher.

    I kind of suspect that the thing is that no one insurer has the ability to cut costs by fiat the way the government does when it announces that it’s cutting the payout rate for certain procedures. But I’m not clear whether you can take the rest of the country’s health care and have it act like Medicare without having a significant negative impact to everyone.

    Maybe I’m overly cynical, but my suspicion is that health care costs are mostly man-hour costs, which leaves you with three basic options:

    - Try to get the same people to give the same care at lower cost. (Which hardly seems fair.)

    - Cut demand through government rationing of care.

    - Cut demand/create efficiency incentives by gradually restructing coverage so people are incented not to overconsume, and remove incentives (such as potential litigation) that encourage doctors and nurses to over prescribe and over test.

    All of those will hurt someone, somehow (if only through lost revenue throughput) but I’d think the third is probably the least painful and most beneficial for all.

  • Rick Lugari says:

    So those three companies alone pay over 1.7 billion a year in taxes, which would be part of the overall expense of “health care”. Interesting. I wonder what the industry total is. And how much hospitals, clinics, and the like pay out in taxes every year. I’m guessing that budget insurance policies could be developed and subsidized just from the tax revenue generated from the health care field.

  • You used the ‘word’ ‘throughput’. MOO.

    These are the things that happen when I write at work…

    My wife says that “MOO” is the best comeback ever and she will use it incessantly from hence forward.

  • Texan says:

    Now for another exercize in numerical insanity circa 2009….

    We read recently the TARP bank bailout has pledged $23.7 TRILLION dollars due to bad housing and other stupidities at US banks.

    Many say we Americans cant understand such big numbers. Here’s a handy way in 3 parts to clarify…

    Firstly:
    $23.7 trillion is alot, ok? That’s more than $23 with 12 zeroes after it. That’s like spending $23 million for every million spent. And TARP may just be getting going.

    Or look at it this way:
    Using Census 2000 data or 2008 estimates from http://www.quickfacts.census.gov, we see there are over 304 million Americans. So each uf us, through TARP, have bailed in about $78,000 to bail out the stupids at our friendly efficient banks. Figure that out for your family!

    Or lastly, look at it this way:
    Again census data shows there are about 55.2 million owner occupied homes in the USA. The TARP bailout per each US home owner then is $429,347!

    And guess what the average US home sales value is in the US? In other words, what’s the average home worth? In 2008, it was $292,600, down somewhat from their ’07 peak of $311,000 (http://www.census.gov/const/uspriceann.pdf)

    So, the average American homeowner’s share of the TARP bailout is far more than what their home is actually worth!

    Summed up for the country, TARP has spent to date more bailing out bad bank loans ($23.7 trillion) than the value of what US homeowners actually own ($16.2 trillion, or 55.2 million homes x ’08 average sales price)!

    Nice huh?

    Now that takes some real financial whiz kids and outstanding legislators to come up with that….

  • David says:

    This kind of article is exactly what contributes to ignorant people saying stupid things at town hall meetings.

    First point: Your hypothesis is wrong. Nobody complains about profits sucking up health care dollars, but people do make the argument that private company OVERHEAD

  • David says:

    … odd, not sure why the post posted.

    As I was saying, it’s overhead that’s the problem. A companies bottom line numbers have absolutely nothing to do with how much money the company takes in and what happens to it as it goes through the account process. Interesting numbers for your readers might be the total compensation for executives in these private companies per enrollee versus the equivalent figure for those managing public health care plans.

    The real problem is that there isn’t any way for a private health insurance company to achieve efficiency through the mechanisms of the “invisible hand”. It’s not like making and selling cars. Any 11 year old who knows a bit of math can calculate how much the nation’s health care will cost and we can either decide to pay for that in the most straight-forward manner possible or we can dork around trying to figure out how to make people very wealthy in the process.

  • David,

    Actually, no, I have on several occasions read claims that the need for profits (and the need to satisfy stockholders) are responsible for the high cost of health insurance. Oddly enough, I once even heard this from a blogger who is a PhD economist at the IMF. Just goes to show that ideology is often rather blinding.

    Further, I’m afraid your suggestions above don’t really hold together (though it would not surprise me if they _were_ the sort of misconception peddled at town halls — often by the guy behind the podium).

    Executive compensation is pretty clearly not the villain. If you check this great website provided by right-wing-conspiracy members the AFL-CIO:

    http://www.aflcio.org/corporatewatch/paywatch/

    You’ll see that the CEO of Wellpoint make $8.6M last year (down 42% from the year before due to the company not making lower profits) which works out to twenty-five cents per enrollee. Even if all their C-level executive are paid that highly (they’re probably not) we’re not talking more than a couple bucks a year.

    Nor is “overhead” at insurance companies the main problem. If you take a look at this table from the department of health and human services (table 12) you’ll find that “net cost of private health insurance” (which includes all the money absorbed by the insurance company rather than paid out for the various types of care) has run a steady 11-13% of total insurance premiums collected for the last decade.

    http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf

    A 12% OpEx model is pretty good by any standards — it’s interesting that it doesn’t provide the same breakdown for medicare, but it would be pretty surprising if the government managed to have much less than a 12% OpEx structure, though they do have the advantage of being able to force providers to do some of their administration for them.

    No, the main problem with health care spending (which puts it out of eleven-year-old-with-math-skills territory) is, as even Obama has said repeatedly, that it costs more to provide care in America than elsewhere (mainly because our medical professionals make more and we have more expensive equipment) and people get more total care, but we don’t in aggragate end up much healthier as a result. The whole point of government health care is to make sure that people get _less care_ but end up at least as healthy as before, thus creating savings, and then use those savings to provide care to the small percentage of the population who are currently not getting care or not getting if efficiently.

    The big problem for the Democrats is that no one likes the idea of the government telling them they can’t have care (even if it’s unnecessary from the view of a government regulator somewhere) and so the Democrats are basically trying to obfuscate what they’re doing. That’s always a hard sell.

  • ockraz says:

    I assume that OpEx is operating expenses? (My first thought was that it was a competitor of UPS.) If that worked, then wouldn’t the post office and medicare BTW- I noticed in addition to ‘throughput’ that you used ‘incent’, which is becoming more and more common these days. Whatever happened to ‘motivate’? Poor ‘motivate’- no one loves you anymore :(

    I have a different take on the health care ‘rationing’ meme than most people seem to have around this blog. I agree that reducing choice and access to expensive therapy is the only way to reduce costs, and that Obama has tried to sell the public on the need for reform in order to reduce spending and help the economy. I just don’t believe that the Democrats will do it. I think that there won’t be rationing because they want to get reelected, and they’ll spend and spend until China stops buying our debt. I think the obfuscation isn’t that they’ll screw us on our health care- I think it’s that there’ll be no savings.

    I read in the London Review of Books a fellow who said that the real reason that we kept bailing out banks rather than nationalizing them is that politicians don’t want to own companies which have to say ‘no’ to their constituents. (“Congressman Bob, how could you foreclose on my mortgage?!”) Remember the stories about people complaining about the dealerships that were closed in city X rather than city Y when we bailed out the car companies?

    I wouldn’t be surprised if spending went up after health care reform. One of the ways (as you mentioned) that the government can squeeze out savings is to pay less, but in my experience that has led to more and more physicians refusing to take medicare and medicaid. Since physicians spend a lot of money on lobbyists, I can’t imagine that the same strategy could be used if everyone started getting government insurance. That’s more or less how Japan controls health care costs, and it’s led to increasingly irate doctors.

  • I assume that OpEx is operating expenses? (My first thought was that it was a competitor of UPS.) If that worked, then wouldn’t the post office and medicare BTW- I noticed in addition to ‘throughput’ that you used ‘incent’, which is becoming more and more common these days. Whatever happened to ‘motivate’? Poor ‘motivate’- no one loves you anymore

    Heh. Yes, “OpEx” is local corporate speak where I work for “operating expense” as in “the consumer division is a 17% OpEx business”.

    I guess I would tend to see shades of difference in the meanings of “incent” and “motivate”. I’d see motivating someone as more emotional and “incenting” as providing people with a profit motive, but I’ll admit it’s corporate-ese. Live the life, speak the language, I guess. That’s why I try to read a steady diet of history and older literature — to outweigh the effects of modernity.

    I think you’re right on rationing, BTW. I would guess there will be no cost savings in the end in this health care initiative (or whatever passes in the end) because people are even less comfortable with government being the “bad guy” than with insurance companies being so.

  • Matt McDonald says:

    I agree that reducing choice and access to expensive therapy is the only way to reduce costs,

    That’s not true at all. Litigation costs eat up as much as 20% of the health care spending, tort reform should be able to drop that substantially. Even more, an efficient tort system should eliminate costly and ineffective “defensive medicine” that is practiced here.

    The defenders of Obamacare keep trotting out the infant mortality rate in nations with socialized medecine as an example, and yet our C-section rate is double any of those countries. With such good care how could the mortality rate be higher??? Because C-sections do not on the whole reduce infant mortality, but are far more expensive. What would help with infant mortality? Simple pre-natal care which is not expensive at all… primarily good nutrition and exercise.

  • navtechie says:

    The infant mortality rate meme is old, tired and false.
    That statistic comes from the WHO with figures provided by each individual country.
    Only the U.S. counts a a infant as an infant at all times for statistical reasons. We in the U.S. try to save every infant regardless of the illness and if they die, they are counted as an infant mortality.

    ON the other hand:
    Other countries do not consider a still birth as an “infant death”. Others do not consider babies born before the 37th week that may die from complications later as an “infant death”.

    SO,for the pro-statis health care people it’s all in how you -use- the numbers to achieve the result you want that will help promote the ideology you are trying to force through.

    Or, in the case of those ‘other’ coutries: It is a matter of covering up and hiding their poor medical systems that do not have nearly the quality of care the U.S. can provide for a child born at any time.

  • ockraz says:

    Matt McDonald-

    You’re right, of course, that tort reform is another way to save costs. Is that on the table? I can imagine blue dogs wanting it.

    navtechie-

    That reminds me of something I just saw on TV. I’ve been watching ‘The Wire’ on DVD, and on the show when city hall needed a drop in crime, they told the police department to start being ‘creative’ with how they categorize things- ‘assault and battery’ gets counted as ‘intimidation’, etc.

  • Guy Daniels says:

    You have to be careful with statistics. Many reputable sources (including the Securities and Exchange Commission) report that Health Ins. company profits rose 428% from 2000 to 2007. Did yours?

    Also, you have to be careful about taxes. Companies often report “taxes levied” or the company’s “tax bill”, when what is pertinent is the actual taxes paid, which is zero for 62% of US companies. Google it.

  • You have to be careful with statistics. Many reputable sources (including the Securities and Exchange Commission) report that Health Ins. company profits rose 428% from 2000 to 2007. Did yours?

    Given that I’m drawing here from the public company quarterly reports filed by these firms with the SEC, it would be the same overall source, yes. We can be pretty sure that my numbers, based on these companies’ annual reports, are accurate because if they file false SEC reports their executives can go to jail. Further, there would be very little reason to intentionally under-report one’s profitability as a company, since that would artificially depress your share price and mean that as an executive your in-stock compensation was worth less.

    As for the 428% increase figure, that would indicate, if it covers these same companies, that in 2000 they were making $15 in profit per enrollee. Whether you consider an increase in profits from $15 per person per year to $75 per person per year to be disgustingly high is I suppose a matter of disposition. I certainly could not get myself excited about it.

    I’m not sure how the tax issue comes into it, since none of these companies show much of a difference between their pre and post tax profits — though again, there’s no motive to post lower than actual profits since that will only drive your share price down.

  • Guy Daniels says:

    Thanks for your thoughtful response.

    I worked for a company for 25 yrs (until it’s takeover and destruction) that survived and succeeded on well less that 1% profits. I understand that many successful retailers make around that, especially food retailers who succeed on less than 1% profit.

    I think about the public interests vs private interests. Is it in the public interest (national interest) that health insurance companies make four times what they need to run their companies?

    I’ll resist a rant on ceo annual salaries, but we know they run into the tens of millions for the companies you mention. That should offer some evidence that they are making more money than they need, and also begs the question (from a religious/ethical perspective) – Who needs that much money?

  • Steve Kimball says:

    For Guy Daniels who suggests that companies don’t need to make more than 1% profit – would you invest your money in a company making 1%? If so, why? Why not just put it in the bank and get a more-or-less risk-free 1.5 – 2%? 1% is not enough to attract capital and grow, and if a company is not growing, it’s dying. Glad you don’t run my company.

  • Paul Nielander says:

    Most people do not understand the actuarial realities of a large health insurance company.

    They have such large populations of subscribers that the total loss statistical pick is extremely accurate. This means essentially they are just a money transfer device with fixed known costs as respects the claims payouts. Comparing their profits to premiums is therefore invalid. Premiums are not sales. The companies can basically dial in the profit number based on their administrative costs and what they can sell to the state insurance departments in terms of rate. (Which by the way is quite a lot as the state insurance departments actually live in fear of the large companies).

    The more valid questions are:

    What would the cost to the subscribers be if the large health carriers were non-profit (like many used to be)? What would happen to rates if we removed most of the billions in profits and for good measure most of their advertising budgets and some of the executive salaries and “adminisrative costs”.

    What jobs and processes are redundant and just cause more cost to the consumer. For example, if doctors have to employ 6 more people to fill out forms and justify costs due to so-called “cost controls” by insurance companies who actually pays? Of course it is the subscriber who ends up paying rat increases because the “doctors” have raised rates.

    All this would be acceptable if there were actually competition in the “for-profit healthcare market” but there is not. If you are over 50 and take any kind of prescription for blood pressure or cholesterol good luck getting coverage from any of them. They are in lock step. If you are over 50 and take no prescriptions good luck getting a premium you can pay. They are all in lock step.

    In answer to the question on who would invest in a company that only makes 1% profit? I sure would knowing it was a sure thing and you must know that 1% profit does not translate to 1% dividend on stock – it is much more since the net worth (stock value) of the company is not defined solely by premiums.

  • Matt McDonald says:

    Paul Nielander,

    Most people do not understand the actuarial realities of a large health insurance company.

    yourself among them.

    What would the cost to the subscribers be if the large health carriers were non-profit (like many used to be)? What would happen to rates if we removed most of the billions in profits and for good measure most of their advertising budgets and some of the executive salaries and “adminisrative costs”.

    I believe the answer was provided earlier, in the $75/subscriber range. Of course the converse of an expected 10-20% fraud rate that government health insurance experience vastly outweighs this.

    What jobs and processes are redundant and just cause more cost to the consumer. For example, if doctors have to employ 6 more people to fill out forms and justify costs due to so-called “cost controls” by insurance companies who actually pays? Of course it is the subscriber who ends up paying rat increases because the “doctors” have raised rates.

    You’re joking right? Have you ever filed a federal tax return, or attempted to secure compensation from the Federal government????

    Reality:

    It’s true, comparing gross or net profit vs revenue is not that relevant for what an insurance company needs to make (though it is relevant to the cost of using an insurance company for the purchaser). Return on assets is a better measure of the relative profitability of health insurance vs bank savings or investing in other industries:

    Will a Public Option Hurt Insurance Company Profits?
    Returns on assets, a key measure of profitability, are typically pretty modest too. According to analysis by FactSet, WellPoint’s ROA has averaged 5.8% over the past five years, Aetna’s, 4.2%. Those were, remember, supposedly boom years. UnitedHealth was higher, at 9.6%, but fell to 6.4% in 2008. These are reasonable, but hardly spectacular, results. By comparison, Wal-Mart averaged a 9.2% return on its assets and Dell, Inc. 12.4%.

    Note the unique nature of my post as opposed the pro-government health insurance folks… I posted source for my numbers so that all can see where they came from, as opposed to pulling them from someone’s nether regions.

  • Paul Nielander says:

    Matt McDonald,

    “yourself among them.”

    Sorry, I’ve only led actuarial teams and made hundreds of rate and form filings. I bow to your higher knowledge.

    “I believe the answer was provided earlier, in the $75/subscriber range. Of course the converse of an expected 10-20% fraud rate that government health insurance experience vastly outweighs this.”

    I don’t believe I said all the savings would come from just profits – but it would be a good start. Much more could and should come from major changes in the administrative side.

    “You’re joking right? Have you ever filed a federal tax return, or attempted to secure compensation from the Federal government????”

    Yes I have and it can’t be too much worse than the paperwork that has to be done to remove a hangnail with Humana now. By the way your bias is showing in a major way as no where in my comments did I advocate a government plan – you must have added that in your head.

    “It’s true, comparing gross or net profit vs revenue is not that relevant for what an insurance company needs to make (though it is relevant to the cost of using an insurance company for the purchaser). Return on assets is a better measure of the relative profitability of health insurance vs bank savings or investing in other industries:”

    Thank you for making my point about the actual financial side of the large health insurance carriers.
    The point remains that these large companies can predict their losses with a precision that virtually no property casualty company can.

    “Returns on assets, a key measure of profitability, are typically pretty modest too. According to analysis by FactSet, WellPoint’s ROA has averaged 5.8% over the past five years, Aetna’s, 4.2%. Those were, remember, supposedly boom years. UnitedHealth was higher, at 9.6%, but fell to 6.4% in 2008. These are reasonable, but hardly spectacular, results. By comparison, Wal-Mart averaged a 9.2% return on its assets and Dell, Inc. 12.4%.”

    Either you did not read my comments or your bias is still showing because you just made my point again. The ROA for the major health insurance companies may not be as high as Dell or Walmart, but Dell and Walmart are subject to much more market volatility than the health insurance companies (unless the government changes this). Up till all the recent furor the health insurance companies were a long term sure thing. Walmart isn’t and Dell really isn’t.

    “Note the unique nature of my post as opposed the pro-government health insurance folks… I posted source for my numbers so that all can see where they came from, as opposed to pulling them from someone’s nether regions.”

    The “unique nature of this post” has nothing to do with looking up a few facts (which still support my position) but the fact that you are blindly arguing an anti-goverment stance on which I never took the other side. I am anti-current market conditions not pro-government.

    My overall approach is that I disagree with just about everything coming out of Washington and the current administration. I do, however, believe that access to health care is a right guaranteed by our constitution and basic human rights. Consequently, I believe something has to be done about the monopoly being enjoyed by the major health care insurance companies.

    What I would like to see happen is:

    1. Health care insurance companies should be regulated at the federal level rather than the state level. This would allow a lot more competition as they could cross state lines and use bigger actuarial (there is that area that you know a lot more about) pools in setting rates. This also might allow for a lot more real cost savings as the current lack of any real competition is killing we consumers. I guess you will have to take my word on the fact that there is little competition but if you have a minute ask anyone over 50 trying to buy coverage for themselves. I have asked many.

    2. Health care insurance co-ops need to be chartered and used – specially for those who are not in a big corporate plan. These would operate just like the already chartered Risk Purchasing Groups and Risk Retention Groups already chartered at the Federal level for property and casualty insurance. By the way they work pretty well and haven’t put a company out of business yet.

    3. We must remove the current paperwork snafus and prior approval stuff that doctors and patients have to go through now to be sure the letter of a for profit company contract is adhered to. The contracts should be very simple – if you need healthcare it is paid.

    4. There must be mandatory membership in some sort of insurance plan so most people are contributing to the overall pool even if the plan has high deductibles with a low premium. This is called financial responsibility in auto insurance and the time has come for it in health care also.

    As indicated your diatribe was interesting but overall missed the mark by a mile and your attack on “pro-government health insurance folks” was less than compelling.

  • Paul,

    My analytical work is all in tech marketing/finance, and I’m certainly not an actuary, but when you say:

    They have such large populations of subscribers that the total loss statistical pick is extremely accurate. This means essentially they are just a money transfer device with fixed known costs as respects the claims payouts. Comparing their profits to premiums is therefore invalid. Premiums are not sales. The companies can basically dial in the profit number based on their administrative costs and what they can sell to the state insurance departments in terms of rate. (Which by the way is quite a lot as the state insurance departments actually live in fear of the large companies).

    I’m recalling the WSJ article I read a few weeks back which got me thinking about writing this post in the first place. Since most of the article is subscriber only now, I’ll quote the relevant sections:

    WellPoint reported a 7.6% decline in its profit and a drop of 338,000 members in the second quarter, as more people lost their jobs and health insurance. The resulting loss of premium income was compounded by the fact that WellPoint members who remained in employer health plans were getting more care and generating more costs for the insurer.

    Like Aetna, WellPoint reported that hospitals have been billing it for more services or more expensive services per case. Part of that rise in billing could be driven by patients who are stepping up their use of medical care, particularly those recently laid off or who fear the loss of their jobs, the insurer said.

    That behavior is fueled by a growing number of laid-off workers staying on their employer health plans under the federal Consolidated Omnibus Budget Reconciliation Act, or Cobra rules. Those workers tend be sicker and costlier since the higher price of Cobra premiums tends to discourage healthy people.

    The increased costs WellPoint incurred from more patients taking advantage of more expensive medical services amounted to $10 million in June and are projected to reach $200 million by the end of the year, says WellPoint Chief Financial Officer Wayne DeVeydt. WellPoint added that the flu epidemic and a rise in prices for medical services would also put pressure on costs.

    WellPoint’s second-quarter profit slipped to $693.5 million, or $1.43 a share, from $750.5 million, or $1.44 a share, a year earlier. The earnings included a net investment loss of seven cents a share. Revenue for the quarter decreased 1.6% to $15.41 billion.

    The company said it now expects its medical-cost ratio, or the share of members’ premiums it spends to pay medical costs, to edge up to 82.9% this year from the 82.7% it forecast in the first quarter.

    Now, obviously, I’m not crying that Wellpoint is seeing a higher than expected “medical-cost ratio”. They’ve big boys, they play in a very profitable game, and most of the decrease in profits they’re getting hit with is simply the result of having fewer customers due to the recession. (Goodness knows, I know what that one fees like.) But at the same time, if the medical cost ratio is so highly predictable, one would think that it would be very attractive for a health insurance company to either work more efficiently (cutting it’s administrative costs in order to increase profits) and/or cut its rates in order to win more business. That most of Wellpoint’s decrease in profits was the result of losing customers of course underlines that one of the clearest ways to increase profits would be to gain market share at the expense of other insurers. Certainly, I’ve seen the companies I’ve worked for over the years switch insurers a number of times in return for better rates, and so it seems clear that there’s a strong incentive to drive towards lower rates in order to maintain a competitive edge. If you take your profits per enrollee too low, you can’t make it up in volume, but given how high the cost of health care is I would imagine that you should see pretty decent price elasticity. And goodness knows, most large employers have both the ability and motive to shop for the best price for benefits good enough to satisfy their employees.

    Maybe regulation has created some perverse incentives that I’m not thinking of, but otherwise it seems like if medical costs are so clearly predictable, that would indicate that health insurance companies are already both able and highly incented to run as tightly as possible and offer the lowest prices possible for coverage.

  • Guy,

    I worked for a company for 25 yrs (until it’s takeover and destruction) that survived and succeeded on well less that 1% profits. I understand that many successful retailers make around that, especially food retailers who succeed on less than 1% profit.

    Not to be flip, but having a fairly established and large company which is only running at a 1% profit margin is kind of bait for the kind of people who takeover and break up companies — on the theory that the parts are worth more than the profit the whole is currently producing.

    Based on the discussion above, I don’t know if the straight net profit percentage is the best way to gauge a health care insurance company, but just to be clear on net profit margins, a few examples might be illustrative (all figures are last fiscal year annuals taken from Google Financials):

    Safeway (grocery) 1.64%
    Kroger (grocery) 2.19%
    Humana (health care) 2.24%
    Home Depot (home improvement) 3.24%
    Amazon (online retailer) 3.41%
    Wellpoint (health care) 4.07%
    Wells Fargo (banking) 6.34%
    Verizon (communications) 6.6%
    HP (computer hardware) 7.04%
    Travelers (insurance) 11.95%
    Apple (computer and consumer electronics) 14.8%
    Microsoft (software) 24.93%

    Now, I’m not an expert in how health insurance financials work, but this doesn’t look to me like these companies are making off like bandits.

  • Paul Nielander says:

    DarwinCatholic:

    Thanks for the interesting WSJ article and I think I see your point.

    “But at the same time, if the medical cost ratio is so highly predictable, one would think that it would be very attractive for a health insurance company to either work more efficiently (cutting it’s administrative costs in order to increase profits) and/or cut its rates in order to win more business.”

    Unfortunately I’ve been an insurance industry insider and what you describe should be the way it would works rather than how it works. The health care insurance players are too few and too big for any real competition to take place There are really only 5 or 6 large health insurers and maybe 20 or so real smaller markets. Compare this to the Automobile insurance market where there are hundreds of players and you see ads for Progressive, Allstate and Geico everywhere. Yes every once in a while you will see an ad for health care, but there is no real competition.

    I’m sorry if I sound like a broken record, but the lack of real competition in this arena is my major bugaboo. The major health insurance companies have virtual monopolies in their geographic markets and have no real incentive to do the streamlining and have the customer orientation that they should.

    For example, Allstate has a “black box” of artificially intelligent underwriting processes that allow it to decide on automobile acceptance and rate based on very little information and with very few people being involved. Policies are broad and the claims process is actually a competitive advantage. That is how they compete on cost.

    In contrast, the health care companies have complicated contracts (ever try to get a copy of the actual contract?), an acceptance process like a minefield and a claims process with trip wires and traps (ever hear of pre-approval?) that no one can really understand.

    I apologize for writing so much in these comment areas and will retire to let others tear my thoughts up, but I cannot change my mind in this topic.

  • Blackadder says:

    Paul,

    Thanks for your comments. I found them to be very informative. I wonder, though, when you say:

    The health care insurance players are too few and too big for any real competition to take place There are really only 5 or 6 large health insurers and maybe 20 or so real smaller markets. Compare this to the Automobile insurance market where there are hundreds of players and you see ads for Progressive, Allstate and Geico everywhere.

    I would think that the lack of TV ads for health insurance would have more to do with the fact that individuals aren’t typically the buyer in the case of health care (sure, you can have an individual plan; I do; but most people get their insurance through an employer or the government) whereas they are the buyer for car insurance, etc.

    I’m also not convinced that the fact a 50 year old with a pre-existing condition would have trouble getting an individual policy means there is a lack of competition between providers. If prices are uniformly too high that may be a problem, but I don’t see how that translates to a lack of competition, any more than the fact gas stations across the street from each other always have the same price means that they aren’t competing with each other.

    Assuming that there is a lack of competition among health insurers, the question would be why that is. From your proposed reforms, I take it you think state regulation is part of the problem. I won’t disagree with that. Is that it, do you think, or is there something else going on?

  • Matt McDonald says:

    Paul Nielander,

    The health care insurance players are too few and too big for any real competition to take place There are really only 5 or 6 large health insurers and maybe 20 or so real smaller markets. Compare this to the Automobile insurance market where there are hundreds of players and you see ads for Progressive, Allstate and Geico everywhere. Yes every once in a while you will see an ad for health care, but there is no real competition.

    now this is an accurate depiction of the problem. But ask yourself WHY is it that auto insurance is competitive and health is not? It’s not the insurance companies decision to be regulated the way it is. The problem is caused because the market is inefficient. Many states have required mandated coverage above a reasonable minimum, purchasing across state lines is banned, and probably most importantly, the insured is not the customer, the employer is. The way to resolve this is simple, but it’s objected to by fans of big government (don’t kid yourself a government made “co-op” is government).

    1. Move tax benefit to insured so that individuals can purchase through employer or privately as their choice.

    2. Allow every individual the choice to buy any state authorized plan. This need not and should involve a massive federal encroachment, as Paul had suggested. Federalizing the system would diminish options, not increase them.

    4. Tort reform!

    The constant attacks on health insurance companies masks the true reasons why health care is so expensive, most of the excess cost is in the cost of care itself. We need to emphasize the use of insurance as, well, insurance, not pre-paid health care, which reduces the competitiveness of health care.

  • Chi says:

    UnitedHealth Group has reported its earnings for the second quarter of 2009, which beat analysts’ expectations with profit of $859 million. What would Jesus do with all that profit? Would he give it to someone who’s life depends on an operation they can’t afford or would he buy an new yatch? Think about it.

  • Marsha says:

    Healthcare Provider Costs vs. Health Insurance Costs

    I am continually stunned by all the supposedly smart people who fail to discuss healthcare provider costs along with health insurance costs. They cannot be separated.

    12 years ago, I had the opportunity to help market a business based upon increasing the profitability of physician and clinic practices. The business consultants would analyze a practice and recommend which tests a physician should do based upon profitability. The owner of the business was very excited about how he could make specialists more profitable through not only test recommendations, but “synergies” through partnerships or affiliations with labs, imaging facilities, etc.

    Health or Wealth

    It should come as no surprise that healthcare is no longer about health, it is a way to become wealthy.

    My father ran a laboratory. He knew what it cost to make a modest profit that allowed him to run a lab, provide for his family and still keep costs low enough for patients to afford. When he retired and a healthcare system bought him out, he watched the prices skyrocket. Profits when up several hundred percent. Needless to say, the gentleman who is president of that organization makes several million in salary.

    Tort Reform or Regulation of Monopolies?

    In Wisconsin, where there are caps on medical malpractice, health care (not just insurance) costs have skyrocketed to 30-50% above the national average. A study done in 2005 showed that the increased vertical integration of the healthcare systems, duplication of services, the lack of independent physicians and the resulting unregulated monopolies have caused costs to skyrocket.

    While the medical industry blames threats of lawsuits, remember who is making the profit when doctors in a system send patients to their systems’ testing facilities. The doctors within some systems find themselves reprimanded for sending patients elsewhere.

    In the early 90s, Ross Perot warned that unless we control health care provider COSTS, we will not be able to control health insurance costs.

    Why can healthcare providers in Europe, Japan, and South America provide the same CTs, MRIs, lab tests, Drugs, etc., for fraction of the cost of the US? It’s simple. The costs are regulated.

    Looks like the man with big ears was right.

    (And the man who earlier pointed out that corporate profits do not tell the whole story about where the money was going is certainly vindicated by Wendell Potter, an insurance exec with a conscience. Read his accounts of how your dollars are spent and expensed. That should make you angry. If you were a stockholder in another type of company, i.e., the Koss Corporation, and executives were spending millions on themselves, the company would be sued.)

  • irish44 says:

    I am Canadian. I dont pay 1 penny. My taxes may be a bit higher, but i get free covergae. Doesnt matter whats wrong with me, its free. The only time i have to pay is for a new drug.

  • UniversalHealthCareIsIt says:

    Please compare the health care systems of European countries and the cost –with the cost of the U.S. system. Health care is for everyone in those systems and compares well cost-wise.

    How much do the execs receive in pay and bonus’ in our insurance companies? Isn’t that deductible from the overall profit to make it look a little bogus in how much profit is made off of each patient/enrollee? How much money is spent on deductible advertising against universal care and/or lobbying?

    Why not compare the population of the US that need health care to the population of other countries and cost to each citizen to provide universal coverage to recipients? Who cares about the profit margin of corporations? Why should health care involve profit in a Civilized society (And Christian)?

  • How much do the execs receive in pay and bonus’ in our insurance companies? Isn’t that deductible from the overall profit to make it look a little bogus in how much profit is made off of each patient/enrollee?

    As I pointed out farther up the comments — executive salary and bonuses doesn’t close the gap at all. At most, that’s a couple dollars per year per enrollee. For all that executive salaries can look egregious compared to ordinary incomes like yours and mine, they really dont’ make up a very large percentage of corporate outlays at all.

    How much money is spent on deductible advertising against universal care and/or lobbying?

    Given that their total operating expenses tend to be under 15% of collected fees — not very much. Most of that money goes to the salaries of the people who run the company, ordinary working people like us. Not high priced lobbiests.

    Who cares about the profit margin of corporations? Why should health care involve profit in a Civilized society (And Christian)?

    “Profit” is just the difference between the amount it costs you to perform a service and the amount you charge for it. If you owned your own business “profits” would be what you used to buy food for your family, pay your mortgage, etc. With publically owned corporations, “profits” what investors receive in return for providing the company with the investment money to start and operate.

    I’m not sure why it’s necessarily more shocking for there to be profits providing health care than it is for there to be profits selling groceries or profits building houses.

  • UniversalHealthCareIsIt says:

    Locally, our health care clinic-a for profit business- refuses to serve anyone without proof of insurance and sends them to our small city hospital emergency room. This in turn costs the small town hospital and eventually all of us. Why not compare our system of health care and profits (and lack of it with emergency room care) with the more efficient and effective European systems that are far superior to the US system. With all of the unemployed people still in need of health care going to emergency rooms, what sense does our system really make? Your article is about Insurance and profits and my point is about health care for God’s children. All of them.
    And the most effective and low cost systems are not found in our country. Check it out and compare the U.S. system and GNP spent vs. services provided for all– with the Europeans systems. And Canada. The overall cost spent is less elsewhere.

  • Why that local clinic is behaving so stupidly, I can’t imagine. Our local for-profit clinic chain not only allows you to simply pay if you don’t have insurance, but offers a discount card so you can get 20% off if you will be paying up front long term.

    I became their loyal customer back when I didn’t have health insurance, and they were very helpful and understanding. Now that I have insurance, I continue to go there.

    There are good features to some of the various systems in Europe — though most of the savings have to do with people getting fewer procedures and medical practicioners making half what they make in the US. However, the health care reform currently sitting in congress has none of the positive features from Europe, and a number of very bad features.

  • UniversalHealthCareIsIt says:

    I agree with you about the current health care reform bill. It does not have the “right stuff.”

    I am curious that you did not include profits for my insurance provider Cigna. Currently I pay 16 percent of income for coverage and the company pays an equal amount with a 10 per cent co-pay.

    If my facts are correct about Canada-the cost in health insurance tax to everyone is 13 per cent.
    Everyone has coverage –so please compare percentage of costs paid out for coverage. Although it would appear that Canadian pay more taxes-Americans that can get health insurance coverage -pay more in premiums and co-payments, wouldn’t you agree?

    I agree that our local health care clinic is behaving badly!!! Gosh, they wouldn’t even allow one patient who needed to pay a 10.00 co-pay to keep an appt. but then the kindly Doctor stepped in and made the small co-pay when he saw what was happening. (Just one example that I know of.) People are struggling around here and likely all across the country. Unfortunately here we have one company that serves most people in our area and just send people to emergency if they have no proof of insurance. Sad but true. And thanks for your ear by the way!

  • boobs says:

    you realize that the profit for wellpoint by those number you’ve shown is 2 and a half billion dollars? you should put that in your article as well. im sure it doesnt look like 75 dollars of profit on one person is alot, but it adds up. You dont think 2 and half billion is a little bit excessive?

  • Zalmon Pober says:

    Did anyone bother to devide the total revenue by the number of participants… For Wellpoint they are reporting that the average premium is nearly $1800/year. Where have you seen a premium that low. Something is wrong with the data.

  • The main cause of that is going to be that this data shows number of enrollees, not number of premiums. So, for instance, my own coverage is through Humana. We pay one premium, but have six enrollees (me, wife, four kids). If you assume the average insured household has four people in it, you’ll get a much more realistic number.

  • Matt says:

    It should be noted that the profit is money made above and beyond all costs, including, pay, bonuses, business trips, legitimate medical costs, etc. So after everyone in the company gets paid. The company still makes btwn 650 million and 2.5 billion dollars.

    I buy private insurance from one of these companies. I am healthy active and young. Even with a high deductible I pay roughly 10% of my monthly income on premiums. When doctors visits are required, I pay them out of pocket up to my deductible. So, I am essentially paying for the peace of mind that if a major accident occures it will only put me and my family about 15 grand in the hole. Unless I get really hurt and hit my limit then the sky is the limit.

    Does’nt this seem like f-in robbery to anyone else? In the mean time lack of real competition between companies within the States means that they can implicitly price fix in order to make those profits. I was always taught that the bigger the market, the larger the number of firms, the closer the market structure was to pure competition the better. Well folks unless I am mistaken we will be getting closer to pure competion when companies start making closer to ZERO economic profit.

  • Rick says:

    Could someone explain how Wellpoint, for example, can cover 34 million people with only $61B in revenue? Based on those numbers, the whole country of 300 million could be covered with about $550 billion. How is it that we spend $2 trillion for health care in the USA? Also, less than $2K of revenue per enrollee seems low if it’s supposed to represent a full insurance premium for a typical member of a diverse group.

  • Could someone explain how Wellpoint, for example, can cover 34 million people with only $61B in revenue? Based on those numbers, the whole country of 300 million could be covered with about $550 billion.

    Well, let’s see. First off, by far the most expensive portion of the population is covered by medicare. $396B for about 45 million Americans. Which, if you’re counting is $8,800 per enrollee.

    Also, keep in mind, that money which people pay out directly to their doctors (copays, deductibles, etc.) never shows up as revenue at the insurance company.

    That said, most large companies (which use insurers like Wellpoint) partially or wholly self-insure, which means that not all the money collected as premiums actually goes through the insurer. That would lower their total revenues, though the profit per enrollee figures would still be accurate.

    I’m not really clear why so many people are convinced there must be some simple problem with the financial info here, given that it’s taken directly from the publicly available SEC filings of the companies. It’s not like they’re allowed to fudge these things. (If they do, the execs go to jail. Something tells me they don’t want that.)

    Also, less than $2K of revenue per enrollee seems low if it’s supposed to represent a full insurance premium for a typical member of a diverse group.

    It’s not necessarily the whole premium. For instance, I pay a premium through my employer (around 10k/yr if you look at my part and their part) but that premium covers all six members of my family: six enrollees.

  • Rick says:

    That seems like a reasonable explanation for why insurance company revenues were only $2K per enrollee, if the Medicare, Medicaid, company self insurance, copays, deductibles, lots of dental, lots of optical, and probably lots of OTC expenditures are taken into account. But this means that insurance premiums only account for about 30% of $2 trillion annual health care costs/expenditures in the country (can someone confirm this?), if you use the $2K per enrollee for Wellpoint as the norm. If 70% of US health care costs have nothing to do with insurance companies, then how does the US lower health care costs from 16% of GDP to 10% like most of our competitors? It’s true we support a whole army of lawyers with our health care dollars, and our doctors earn 2-3 times the purchasing power of doctors in countries like Germany, but not others like Australia. If fraud contribute disproportionately, why would the US have so much more of that than our competitors? Is it the bueaucracy of not having a single payer system? I guess each factor contributes a little and our diet and lifestyle contribute a bunch. Is there any way we can DRAMATICALLY lower health care costs so that we are economically competitive?

    From 2001-2008 manufacturing jobs in this country fell from to 18.2 million to 12.7 million. Most of the service jobs added during that time were the direct result of unsustainable debt increases (government and private)and the housing bubble. So really the US has created no jobs for 10 years, and probably will actually have lost jobs by the time the new economic equilibrium is reached. The status quo in health care is unacceptable if the country is to eventually have job creation and economic growth.

  • Joe says:

    Look,
    The real data is that we can and in fact already do spend about what they are making in profit as a nation on healthcare, with Medicare. At about 5%-6%. One of the many other unmentioned pieces you won’t find in this data is that if I am a doctor and have to employ 4 people just to collect from insurance and the insurance just staffs up with 5 for my every 4 people and that’s the unprecedented demand of capitalism that has to be the answer to everything always even in the face of even uncontrollable abuse. In the real world communities and cultures have always thrived when education and well being is first and foremost and these days neither are part of the solution to some.
    To many this about “I’m scared” and I get that. For other’s it’s a true fundamental difference in opinion and I used to be able to respect that point of view when it was a strong Barry Goldwater type of liberal vs. libertarian (conservatism meaning something totally different in his time) arguments. Those have been replaced with if you want everyone to have access to good affordable healthcare you’re a socialist, communist, fascists, and no one using those words even know the difference between the three. They just use it like a child might use the term “doody head” in the school yard. I still don’t even know what that means any more than the way these terms are thrown around to discuss possibly the most serious social-economic issue of our day. Status quos is the only other answer.

  • Idealist says:

    What your crude analysis does not point out is, just the executive compensation for the top 5 individuals at Aetna is approximately $43,000,000 for 2008 alone. A big chunk of that is in the form of options and awards, but the expense still reduces the profit margin for the year. In addition to the top 5 executives, there are numerous directors, board members, etc which received huge payouts. All adding to the cost of health insurance and “lining the pockets of insurance executives”. Furthermore, Aetna had $482 million of investment losses in 2008. In order to make that up, they either raise premiums and/or squeeze the health care providers.

  • bozzie says:

    I appreciate your considered response but apparently FIRM is an organization advocating “free market economics in health care”, “We at FIRM oppose all forms of statist or government controlled medicine and health insurance. “ and they obviously have a political agenda. I suppose that the World Health Organization is used by the media because they are an organization that has credibility. I trust them. The W.H.O statistics are as they say the worst available except for all the others that have been gathered. I also noted the less variable statistics on infant mortality (a standard in determining healthcare efficiency) as a more succinct example of the advantages of universal healthcare. Surely this would be a prime indicator. In terms of healthy outcomes universal healthcare has an immediate advantage over a health care system that leaves out over 10% of its population. That seems like a logical proposition.

  • bozzie says:

    The figures on Cuba are actually credible as they have a very high patient to doctor ratio and universal coverage. The example you give of Singapore “As far as per capita costs, did you read the bit about the system in Singapore ? Using market driven incentives and personal control they spend less than the socialized systems.” Singapore is a city state controlled by a small patriarchy which only has 23 hospitals. It does make use of private insurance companies but the people can also choose to use the government provided healthcare plan. The pricing of all healthcare in Singapore is decided by the small ruling body. Healthcare in Singapore is highly subsidized and the citizens are required by the government (automatic payroll deductions) to make deposits to a healthcare savings plan. There are few market driven incentives because there is no free market do to the government setting the prices of services.

  • bozzie says:

    You wonder why no one has established a non profit health insurance company. That is a good question. Apparently is is done in Canada and other countries and it is has also been done in several states. They are called cooperatives. Puget Sound Health Alliance seems to be a successful example. Medicare is an example as well.
    You are right about the profit margins of insurance companies not being outrageous but look the executive compensation for the top 5 individuals at Aetna. It is approximately $43,000,000 for 2008 alone. These expenses will reduce the profit margin for the year and these are only for the top 5 earners.

  • Bozzie,

    1) It’s been quite well documented that the differences between Cuba’s infant mortality statistics and those of the US have to do with how extremely premature births are counted.

    2) Your characterization of Singapore’s health care system leaves much to be desired. Though it is certainly not a libertarian paradise, it is arguably one of the most market-driven health care systems in the world, and delivers some of the best outcomes at the lowest cost. (Single payer is, by comparison, far less efficient.)

    3) There actually have been a number of non-profit health insurance companies in the US, but their rates have not been measurably lower than for-profit ones.

    4) While people like to call executive compensation “outrageous”, it honestly makes up a very small portion of a company’s expense line, and health insurance companies are no different from others in this regard. While these compensation packages may look (or indeed be) excessive, they are not excessive in comparison to other companies, and they pale in comparison to the costs to a company of having bad leadership.

  • FreeMarketMasquerade says:

    Color me confused but in a free market you have buyers PAYING for goods or services from sellers. But in US healthcare the seller has to sell even if the buyer cant pay. If you get sick in this country you do not have to pay for healthcare. You show up to the ER when sick and then get admitted for treatment if required. I personally know 2 people in their mid 20′s who showed up sick at the ER without health insurance: one required 2 emergency surgeries for undiagnosed Krones Disease and the other was diagnosed and underwent extensive treatment for Leukemia. They both spent over a month in the hospital. Who exactly is paying for their massive healthcare bills which collectively totaled over 550k dollars for 2 people? I presume that the state payed a portion and then I presume all those who are responsible and carry health insurance paid the rest thru premium increases. I would enjoy some insight.

  • Robert says:

    Certainly this is a highly volital and charged topic with highly motivated champions on both sides.

    I would like to withhold my opinions but be allowed to ask some questions.

    First. Is health care really a business or a social necessity?

    Is it moraly and ethically the correct thing to profit on something that is essential to life and if so who should determine the profit margin?

    If American health care, as it now exists, offers the best advances, treatments and options of any nation why are americans not healthier and recieving better treatment than people in other nations?

    Is it in the best interest, for the health and welfare of americans, to allow a business to determine what should be treated or denied and how much to pay for such treatments based on the cost and profit margins of that treatment?

    When the options are pay the price or die, who should watch over and regulate the costs, expenses and salaries associated with health care?

    Is this an industry where being competitive is really our best choise? Or perhaps one in which being united and working as a collective is more effective?

    Do you get the best care from the ambulance chaser or the concerned and caring family Dr?

    Should profits or the well being of americans be the driving factor? And should the equality of those americans and uniformity of health care, not based on the individual wealth of each american, be the driving factor?

    In a nation with the ideology, of the people, by the people and for the people, is being competitive or united the more effective approach?

    Should the quality of life or the quest for wealth be the deciding factors in heath care?

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