Profit Margin: Health Insurance Industry Ranks #86
Private health insurance companies have come under attack lately for making profits, even "record profits," allegedly because of mergers, lack of competition, and monopoly power.Health Care for America Now: Simply put, the private insurance companies have secured monopolies or tight oligopolies and exercised that power to put profits ahead of patients.
There were no actions taken against anticompetitive conduct by health insurers in the last administration, in spite of the fact that cases by state attorneys general have secured massive fines against these insurers. A lack of antitrust enforcement has enabled insurers to acquire dominant positions in almost every metropolitan market. Unfortunately, this toxic market structure has a profound effect on the nation’s ability to achieve the goals of health care reform.
President Obama: There have been reports just over the last couple of days of insurance companies making record profits, right now," Obama said during a prime-time news conference. At a time when everybody's getting hammered, they're making record profits, and premiums are going up. What's the constraint on that? ... Well, part of the way is to make sure that there's some competition out there.
MP: As the table above of Profit Margins by Industry shows (click to enlarge, data here for the most recent quarter), the industry "Health Care Plans" ranks #86 by profit margin (profits/revenue) at 3.3%. Measured by profit margin, there are 85 industries more profitable than Health Care Plans (includes Cigna, Aetna, WellPoint, HealthSpring, etc.).
And isn't one reason for a lack of competition that competition for health insurance across state lines is prohibited, creating in effect 50 state health insurance "cartels?"
Posted @ 1:35 PM Post Link
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42 Comments:
Well now Professor John David Lewis has dissected HR 3200...
I think I shall someone should send this to flag@whitehouse.gov, because they're keenly interested in getting the facts right, ya know.
Mark,
I've worked on the business end of healthcare in Canada, the US, and in Ireland, for about 5 years out of a 20+ career in industry and the public sector.
My interest has always been, not about the profitability of the sector, but about its efficiency. Each of the healthcare sectors in the countries I've worked in have significant challenges.
They all share a system that allocates some services to the government and some to the private sector. Obviously the balance is shifted more to the private sector in the US than in Canada or Ireland.
However, one of the main disadvantages of the private sector insurance funded system in the US is the administrative cost incurred by patients, healthcare providers, and the insurers as the insurance companies routinely challenge procedures, even those they pre-approved.
In just one example, a US Northeast hospital group determined that nearly 100% of pacemaker insertions were pre-approved, nearly 100% were subsequently challenged, and that just about 50% of their total cost for the procedures related to filing and defending against non-payment by insurance companies.
That doesn't mean that a publicly funded system is de factor lower cost, but it does suggest significant reform and cost reductions are available.
And this is not even risk-adjusted profit margin.
Don't ever expect a liberal or a journalist to understand relative vs. absolute statistics. They exploit dramatic headlines, not cool-headed truth. Thinking is kryptonite to them.
BTW, has anyone heard the Iraq and Afghanistan body counts lately? The media stopped counting dead soldiers for us last November. Apparently it's not news anymore. It serves no 'social purpose' anymore.
I think the message here is to go into the business at the top of the list and open a brewery: you make plenty of money and you won't care much about the substandard medical care you receive from Obamacare due to the palliative nature of your product :)
I think insurance is important, but we must remain cautious in selecting insurance institutions, search the best of our opinion. Thanks for sharing.
My question is, if the proposed health care bill is really about creating fair competition and the public option is open to all citizens, regardless of the state they live in, does it also provide for the deconstruction of regulation which prevents private health insurers from competing on that same level (i.e. across all states)? My guess is, probably not.
Who compiled this table? How did they determine the numbers? Is it verifiable elswhere? From here, it looks like more insurance industry propaganda. Back up your claim!
And David, I ask why you don't think, as I do, that the U.S. system's high administrative costs are actually a direct result of the micromanagement of medical practices by government (and by the lawyers), and not something that government can "fix"?
rjsgso: As I always try to do, I have a link to the source of the data for profit margins by industry. The data are available at YahooFinance, and I believe they get the data directly from the publicly-available income statements of the publicly-traded firms.
INTJ,
In my example of insurance companies routinely refusing to make payments for pre-approved cardiac pacemaker insertions I don't see the heavy hand of the government.
For the fun of it I looked at the balance sheet of CI. Looks like a pretty dead industry to me. A company of 30K makes about 1billion a year on 17-20B of sales. Not bad, but not real great. Banks, oil companies, and manufacturing greatly exceed these numbers on a regular basis when times are good. CI is one of the biggest players, and they seem pretty puny to me. I don't think there is really that much to squeeze out of these companies,
Trailing 12-month profit statistics:
UnitedHealth Group (UNH) - $3.49 billion (B) on revenue of $84.27 B for a profit margin of 4.14%
Humana (HUM) - $0.85 B on $30.25 B for 2.79%
Wellpoint (WLP) - $2.43 B on $60.59 B for 4.00%
Cigna (CI) - $0.60 B on $18.93 B for 3.20%
For these four companies, the total is $7.37 B on $194.04 B for 3.80%. Given that these are four of the largest and best-managed companies in the industry, it's not surprising that other companies would pull the margin down to 3.3%. Besides, this would still put health insurance in the #73 slot on the list. Feel free to check the key statistic pages in Yahoo! Finance, which is where I got these numbers, to confirm this.
That should answer the charge of "industry propaganda".
I AGREE WITH CARPE
I AM AN ACTIVE TRADER AND I THINK UNITE HEALTH CARE TIKER (UNH)
THE DAILY CHART LOOKS BEAUTIFUL MY TARGET IS $40 AND UP IN LESS TWO WEEKS SEE ON THE NORTH SIDE
Who compiled this table? How did they determine the numbers? Is it verifiable elswhere? From here, it looks like more insurance industry propaganda. Back up your claim!
From RPM
How about you go do a little searching yourself? Before I found this link (thanks Mark for your blog I have been looking for "facts" so I can call Progressives and my Reps), I found Forune 500 article and then did my own simple math. In 2007 the percentage profit was just over 5%, so if anything the profits may be coming down over time (again only the top Insurance Companies listed as it was a Fortune 500 site). Is it a lot of moola, sure, however, as someone else noted that is accounting profit, not risk and cash set aside for future claims so the businesses can stay in business.
Its not the profits, its the adminstrative costs of the insurance industries. When you run 20% admin costs, life is not bad if are in admin. A lot of money for pushing paper around.
Blow more smoke up my ass.
http://wonkroom.thinkprogress.org/2009/08/05/are-health-insurers-making-too-much-money/
One thing that NOBODY seems to be addressing is the high cost of lawsuits and its affect on health insurance. Why is tort reform off the table??
I'm no Economist, but a low profit margin on a very high volume product still equals a ton of money. People are saying health care costs make up 1/6 of our economy. You do the math.
Anon @ 7:17
"Its not the profits, its the administrative costs of the insurance industries. When you run 20% admin costs, life is not bad if are in admin. A lot of money for pushing paper around."
What exactly do you think an insurance company does that doesn't involve admin?
I suppose you'd be surprised to find out that a bottle manufacturer's biggest cost is glass, right?
Before we worry any more about healthcare, how about we deal with economic illiteracy first.
Actually the 20 to 30% administrative costs is just another lie. Blue Cross as well as other groups have done studies refuting the claim...IT'S A LIE!
Blue Cross/Blue Shield says administrative costs…they sanctioned the study, hired a private neutral firm, and looked at multiple insurers…administrative costs 9% across the board….
http://www.bcbs.com/news/bcbsa/new-study-finds-health-plan-administrative-costs-far-lower-than-previous-estimates.html
A study from Columbia says….nearly the same thing….
http://www.stat.columbia.edu/~cook/movabletype/archives/2009/07/does_medicare_a.html
The Heritage Foundation found the same, but I won't quote them as it may cause the liberal agenda reading this to break out in hives and develop a irreversible stutter....
Interesting that you note that they are 86th in profitability, but you don't say out of what. Turns out its 86th out of 214.
Nevertheless I agree that inefficiency of claims processing is a major part of the problem, btu again this inefficiency is a PRODUCT OF the market.
System wide effeciency for healthcare is considerably higher in all major government run health care systems around the world, from Britian to France to Japan and Tiawan.
Anonymous says, "System wide efficiency for healthcare is considerably higher in all major government run health care systems around the world..."
What??? Is this why 4,000 women in the UK are giving birth in hospital corridors?
http://www.guardian.co.uk/society/2009/aug/26/births-outside-labour-wards
Look at Item #3. You need to change your headline.
wow..I,m so sorry that the health insurance companies are only making a few billion on peoples suffering. I,m sure the 50 million who don't have insurance would be willing to take a pay cut..and give them just a little more profit..after all when their spouse or kids get sick..why should we care...their poor people...and of no use to this country..how about we start looking at ways to help everyone get decent medical care,and worry a little lesss about if the insurance companies make that extra billion this year.and you know i don't recall any of those insurance companies going bankrupt
have a really dumb question. how much did the CEO's and exec's get paid?encluding all their bonuses and stock options?because i,m guessing that would be before profits or do they work for free!
We need to fear the public option. For example, ever since that card-carrying Communist Dwight Eisenhower brought us "public housing" in the '50's, everyone has stopped buying private housing.
At 9/04/2009 3:03 AM, Anonymous Anonymous said...
have a really dumb question
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
No,...THIS GUY:---
At 9/04/2009 2:56 AM, Anonymous said...
"wow..I,m so sorry that the health insurance companies are only making a few.."..etc.
HAS A DUMB QUESTION!
Only HE thinks he has it answered.
The goals of a for profit company are diametrically opposed to the goal of providing the best health care to the most people for the least cost.
Since health insurance companies simply take in money from the insured and pay medical bills with it, there is no justifiable reason that their profit margins should be high. What value are they adding?
When you calculate their ROE, they come out much better, as I’m sure you know.
Other reasons they might not be so profitable: in the first half of 2009, the health care industry spent $280 million on lobbyists.
Compensation for the CEOs of some major health care insurers for 2005 and the prior five years (including 2005):
United Health Group
CEO: William W McGuire
2005: $124.8 million
5-year: $342 million
Caremark Rx
CEO: Edwin M Crawford
2005: $77.9 million
5-year: $93.6 million
Aetna
CEO: John Rowe
2005: $22.1 million
5-year: $57.8 million
Cardinal Health
CEO: James Tobin
2005: $1.1 million
5-year: $33.5 million
Cigna
CEO: H. Edward Hanway
2005: $13.3 million
5-year: $62.8 million
Humana
CEO: Michael McAllister
2005: $2.3 million
5-year: $12.9 million
PacifiCare Health
CEO: Howard Phanstiel
2005: $3.4 million
5-year: $8.5 million
Well Choice
CEO: Michael Stocker
2005: $3.2 million
5-year: $10.7 million
WellPoint
CEO: Larry Glasscock
2005: $23 million
5-year: $46.8 million
Now add to the profit listed, the amount spent on advertising, lobbying and a bit for simple redundancy. THAT is what is left on the table if nothing else and THAT could cover a lot of uninsured people. ELIMINATE THE MIDDLEMAN never made more sense than it does here, insurance companies are NON ESSENTIAL to health care. Cut them out, remove the price of lobbying, advertising and move to single payer system where even the forms are all the same for more efficient processing and you'll have a system that serves the patient's needs.
SINGLE PAYER PUBLIC OPTION is the only way to spread the risk to the maximum and THAT is the purpose of insurance - the whole reason we left that form of gambling legal.
So there.
I'd like to see a similar ranking of data by industry except on on executive compensation rather than on profit margin. Mr. Perry or anyone else, do you have a reference? Thanks.
http://economix.blogs.nytimes.com/2009/09/25/how-much-money-do-insurance-companies-make-a-primer/
I'm starting to wonder WHY is Washington so concerned about the Health Insurance Industry? According to the President and Congress, the industry made $30 billion in profits last year. It's too much. Needs to be fixed.
Didn't ExxonMobil make $10 billion in one quarter all by itself? That works about to about $40 billion in one year for one company, yet Congress isn't all over the oil industry.
I suspect the biggest issue is that insurance costs are bloating as a % of GDP because of unintended consequences of Congress: Medicare and Medicaid spending are simply running away from us - even though they constantly lower their reimbursement rates. (Already about 20% below private insurers.)
As I think about this whole Healthcare mess that has our Congress consumed, I'm thinking they created it. You don't have government entities subsidizing gas at the pump for seniors or poor people. I wouldn't be surprised if the whole pay for service thing accelerated simply because the Medicare & Medicaid rates are simply too low.
There has to be a better, less complicated way to reform healthcare.
BTW - the cooperatives remind me a little of mutual insurance companies; they're a little closer to non-profits in that they don't answer to Wall St. Maybe we would be better off if Congress contracted with some private, mutual insurance companies to provide the public option. I know it sounds a little weird, but WHAT does the government actually run efficiently? And, using insurance companies would eliminate the need to fund billions of dollars to try and get coops established.
Profit margins do tell you something about profitability, but Return on Equity and Return on Investment are better measures. If a company makes $3B a year with only
$.5B of assets, that's too rich from my viewpoint (you may differ).
My guess is that health insurance dollars are spent on labor costs such as doctors, nurses and techs. Comparatively, I don't think much is spent on building construction, maintenance, equipment, drugs, etc.. Thus, the way to cut costs is to cut labor costs. Maybe the only way to cut health insurance costs is to cut doctor fees. Is anyone going to openly say that?
Don't think twice its all right.
The goals of a for profit company are diametrically opposed to the goal of providing the best health care to the most people for the least cost.
In a free market society, private enterprise produces the best products at the best prices...always. Let the government run medical care without any real competition and find out what "diametrically opposed to the goal of providing the best health care" really is.
It's sad to continually read the personal attacks on the integrity of the "liberal agenda." It's really tiresome, and serves no intelligent purpose. Please stop it.
The issue regarding insurance companies is much more complex than net profits or administrative expenses. Health Care Reform is about two things: accessibility and affordability. Private insurance companies are not interested in providing coverage to an extremely large percentage of the American public. Insurance companies are the elephant in the room in addressing the affordability issue as well. It's not tort reform; it's not doctor's pay; it's not the cost of basic medical care. It's the high percentage of the overall dollars in the system that pay for overall insurance company operations, including profits.
This is a moral issue - support insurance companies and their inherent profit motive - which has caused incessantly increasing rates, continually diminished doctor pay and hospital reimbursement, along with ever increasing draconian decisions to deny care for a whole list of reasons for those who have insurance; or reform to a system in which Americans can rely on basic medical care without having to go bankrupt to obtain it. I'm saddened and confused by two things - why protect these guys, and haven't we evolved as a nation to see this at it's fundamental level and work together to bring our nation into the 21st century?
Insurers should be paying us to hold our money. A 3.3% "profit margin" becomes a bigger deal once you realize that insurance fundamentally is little more than a shared checking account. People pay in and they pay out. Who would use a bank that takes 3.3% of all money you deposit?
But that's not even half of it. The profit margin is after expenses. So it may be closer to having a bank that takes 10% or 30% of all the money you deposit.
All that said, there's a larger problem. Even if we find a way to educate insurers on how to deposit and write checks for less expense than 30% of the check, that only represents maybe 4 years of health care inflation and may do little to slow the rapid pace of cost increases.
It may be a sad testament to our democracy, after months of headline coverage, the following fundamental issues have gotten only a glancing survey by the major media sources. First off regardless of competition among check writers (insurance), competition amongst the actual health providers is fundamental to obtaining the benefits of the "free markets" everyone talks about. Health consumers need access to cost and quality information so they can purchase health care rationally. Then innovation at the care level will be properly valued and stimulated because better providers will get higher profits.
Second, while the health industry is far from market driven, the principles of supply and demand can't be overlooked particularly with all the evidence of a health care system on the brink in terms of capacity with rushed physicians and long lines at ERs. Health care supply must be increased. Perhaps this means automating processes now carried out by doctors and finding ways to do more with less training. Care would likely improve with software making decisions based on information in a nationally updated best practices database rather than doctors, particularly in primary care, who have an impossible task of keeping up with all relevant advances in medicine.
Insurance is certainly a more conceptually accessible issue but the heart of the matter lies elsewhere after we train insurers how easy it is to write checks:) These fundamental concepts of stimulating innovation and increasing supply do happen to be addressed in the current health bills but their approach merits debate because after all these are the measures that will actually impact the rate of cost increases. A failure to recognize this is either a surrender to the notion that patients can't be rational consumers and properly choose providers no matter what help they're given (which is certainly worth debate right?) or a simple intellectual error that could literally cost trillions.
What is the source of your information?
As others have said, the profit margin comes after admin costs, CEO salaries, marketing, lobbying expenditures, and other "costs". Even if the insurance industry was run as a not-for-profit organization, there would be a need to reform the system because of how money paid by policy holders is wasted.
I agree with the last anonymous poster. So the question is how to encourage the insurance companies and adjacent industries to be more efficient? I believe part of the answer is to remove the anti-trust exemptions and reverse McCarran-Ferguson Act. Please consider and comment on the following article: http://afamilyguystake.blogspot.com/2009/10/healthcare-reform.html
I continue to be amazed by the lack of knowledge of the insurance industry that drives the public option advocates. They act as if there are zero non-profit health insurers (about every state has a Blue Cross/ Blue Shield). They fail to note that many state government outsource their Medicaid programs and allow guarnteed issue and open enrollment for "low income" people. And, they fail to recognize that there is really any saving from replacing insurance admin workers with bureaucrats and commissions. Does anyone truly believe that 1 bureaucrat will be able to replace 2,3, 4...., private sector workers. Have the proponents looked at the legislation that contains umpteen commissions and bureaus. Does any proponent believe that covering the insured can be done without collection premiums for some of them (universal pooling of risk also requires universal pooling of funds). There are options for low income people but many reject insurance because they may have other priorities, as do many young people who feel that their dollars are best spent elsewhere. The public option in no panacea and tearing down our current system to replace it with an untested theoretical one is non sensical. Alternatives need to be proposed and vetted before any consideration should be given to performing a public healthcare operation in the dark.
My comment is a few questions:
Has anyone looked at the inflationary affect on insurance premiums due to the underpayment of Medicaid and Medicare?
Do Medicaid and Medicare deny claims?
Is there any evidence, other than the IRS, of an efficient government bureaucracy?
How many doctors will retire upon a government take over of the system and what will the inflationary effect of that loss of supply be?
As we all know that insurance is a big business that provide services, it is all to the individualto choose the best insurance company and options for them and for their family.remember to ask whatever questions in your mind before signing a policy after al you pay for this services.
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