Friday, October 23, 2009

Health Insurance Companies Rank #86 By Industry Profit Margin, Earning $98 on Average Per Policy

Click to enlarge.

During his weekly radio address last Saturday, President Obama attacked health insurers for allegedly making excessive profits and paying excessive bonuses, for spreading "bogus" misinformation about the impact of Democrats' reform agenda on the cost of health insurance, and for "figuring out how to avoid covering people." He opined that health insurers are "earning these profits and bonuses while enjoying a privileged exemption from our antitrust laws, a matter that Congress is rightfully reviewing."

Mr. Obama's comments followed hearings by the Senate Judiciary Committee last week. In an unusual move, Majority Leader Harry Reid testified as a witness, alleging that "exempting health insurance companies [from antitrust] has had a negative effect on the American people" and that "there is no reason why insurance companies should be allowed to form monopolies and dictate health choices."

~Scott Harrington's article "
Competition and Health Insurance" in Wednesday's Wall Street Journal

MP: As I reported several months ago the industry "Health Care Plans" (includes Humana, Aetna, WellPoint, Magellan, etc.) ranks #86 by profit margin at only 3.3% (see table above, data here for the most recent quarter), not exactly strong evidence of "excessive profits" or monopoly power. Four health insurance companies (Molina, Health Net, Coventry, and Universal American) have profit margins below 1% for the most recent quarter, and another four (Humana, Magellan, WellCare and Centene) have profit margins between 1 and 2 percent (data here).

America's Health Insurance Plans (AHIP), the industry's trade association representing 1,300 members (how could that be a monopoly?), recently reported that annual health insurance premiums averaged $2,985 for individual coverage and $6,328 for family plans in 2009. Using the industry average profit margin of 3.3% means that insurance companies make less than $100 per policy in profits for individual coverage, and a little more than $200 in profits for each family policy. Doesn't seem too "excessive" or an indication of monopoly power, does it?

Alternatively, even if we could strip away 100% of the health insurance profits, it would only result in about $100-200 of annual savings for consumers of health insurance. Is that what we could expect then from a government-sponsored "public option" that wasn't "profit-driven" - annual savings of only $100-200?


24 Comments:

At 10/23/2009 4:03 PM, Blogger David Rotor said...

The savings or additional costs from a public sector healthcare insurer is only slightly related to the average profit per policy in the private sector.

The real issue is whether there are any efficiencies (such as economy of scale) that can be realized or whether the public option will be less efficient.

 
At 10/23/2009 4:57 PM, Anonymous Rand said...

Don't forget that the governmental insurance "company" employees will have to be unionized. This will more than offset the $100-$200 per policy "profit".

 
At 10/23/2009 4:58 PM, Anonymous Anonymous said...

Obama has no credibility.

 
At 10/23/2009 5:58 PM, Blogger JimJinNJ said...

I read today that insurance companies also have the highest executive pay of all industries. Profits suck bec exec's are overpaid??

 
At 10/23/2009 7:19 PM, Blogger funinthelibrary said...

Margin is meaningless in insurance. It is return on capital that matters.

 
At 10/23/2009 7:28 PM, Blogger Chuck said...

JimJinNJ has discovered a little secret. When a CEO takes hundreds of millions of dollars as compensation it it normally a business expense. Normally, business expenses reduce the overall profit of a business. So are you being "PUNKED" into believing that small margins are indicative of WHAT??? The Mafia can run a casino and show minimal profits, yet all of the "execs" live extremely well. Does buying or renting a Congressman count as a legitimate business expense???

 
At 10/23/2009 9:14 PM, Anonymous Anonymous said...

Re: Executive compensation....
Aetna CEO in 2008 earned less in salary and bonus than the Freddie Mac CEO did in 2007.... The Freddie Mac CEO in 2007 (Freddie doesn't display a proxy report for 2008) did get a slightly smaller long term incentive than the Aetna CEO in 2008...but I do think we want to encourage long term performance results.
Of course, Aetna health insurance has not been bailed out to the tune of $30 Billion....

 
At 10/23/2009 9:26 PM, Blogger Publius said...

What, precisely, constitutes '"bogus" misinformation'? [also sprach Obamalini]

Would that in fact be truthful information?

 
At 10/23/2009 11:24 PM, Blogger Michael said...

I think funinthelibrary has the right take. Insurance companies are required by the government to hold pretty secured assets. It wouldn't surprise me to find that insurance profits come mostly from their assets.

This makes the whole public option a joke. The governments assets can be whatever they want. They'll just take them from the people.

 
At 10/24/2009 1:25 AM, Anonymous Jessica said...

I totally agree with your ranking.

 
At 10/24/2009 2:16 AM, OpenID benbyerly said...

It is interesting however to see how many other healthcare related industries are much higher on the list - e.g. #1 and #6 and #22.

 
At 10/24/2009 6:46 AM, Blogger QT said...

It is also interesting to consider Obama's approach to anyone who does not unequivocally support his policies.

The insurance industry is the latest victim of Obama's bully pulpit.

JimJin,

Care to put some hard #'s around that? Executive salaries as a percentage of revenue or in comparison to other industries perhaps?

I am prepared to believe what you say as long as your argument is supported by data. No data...no sale.

 
At 10/24/2009 11:55 AM, Blogger bix1951 said...

income of doctors

U.S. $216,000

Japan $88,474

Germany %137,585

from Christian Science Monitor
Oct. 11, 2009

 
At 10/24/2009 1:56 PM, Blogger Michael said...

CEO Pay of public health insurance from Forbes data:

-- 22nd place among all CEOs: Ronald A. Williams, Aetna, $38.125 million

-- 135th place: H. Edward Hanway, Cigna, $10.27 million

-- 269th place: Stephen J. Hemsley, UnitedHealth Group, $5.035 million

-- 306th place: Angela F. Braly, WellPoint, $4.07 million

-- 359th place: Robert B. Pollock, Assurant, $3.14 million

-- 387th place: Allen F. Wise, Coventry Health Care, $2.6 million

-- 399th place: Michael B. McCallister, Humana, $2.39 million

The average for the other six executives above was $3.93 million — almost one-tenth of what Williams was paid. So it's clear that HCAN has chosen the highest-paid CEO for its purposes.

It's a lot of money, but even if they gave it back profit margins aren't going to change.

 
At 10/24/2009 6:06 PM, Blogger juandos said...

re: 'income of doctors'...

Hey bix1951 that CSM article didn't mention the costs of malpractice insurance did it?

 
At 10/24/2009 6:10 PM, Blogger QT said...

Correct, Michael.

Exec pay is a very small percentage of the expenses of a fortune 500 company with thousands of employees. I can understand why people get upset about these outsize pay packages and without doubt, some of the compensation seems pretty excessive. Profitability however is not materially impacted.

bix1951,

Not really that surprised that doctors' salaries are higher in the U.S. Median family income is also higher than either Germany or Japan. Not really sure how relevant this is to excessive profits in the health insurance industry.

 
At 10/24/2009 7:56 PM, Blogger BMWright said...

Gee, I'm pro private insurance cos., own shares of AET and UNH, and was beginning to feel sorry for Health Insurance Cos. after reading this analysis.

But then I realized why I invested in AET and UNH. Over the last 20 years our family and employers have paid an annual cost averaging $12,000-15,000 to these two companies and in no year has our family claims/doctors visits paid exceed $3,500 and in most years they were under $2,000. So, they've made more like $9,800 annually off our family.

UNH margins are 7.7% double what this information shows. They just reported, earnings from operations (EBIT) were $1.5 billion and net earnings were $1.0 billion, an increase from $1.4 billion and $0.9billion, respectively, in the prior-year quarters. They only made an additional $140 million off investments.

The reason CEO pay is now more reasonable for both UNH and AET and Big Pharma is because of all the public outcries from insureds and billioniare investors like Carl Icahn over UNH's CEO giving himself a cumulative world historical record high $1 billion in stock options ( not to mention some sweet backdating moves)over his 15 year term. The scandel broke in 2006 (thanks to an Iowa Prof. Research study in 2005 concluding many management stock options might be backdated) and CEO William McGuire's had to step down from the CEO job. He walked out with compensation from UnitedHealth (shareholders), estimated to be around $1.1 billion, that was the largest golden parachute in the history of corporate America. Finally the SEC filed litagation and McGuire was found guilty as charged. You can google the case. This is just one of many examples.

This information does not include the biggest area of excessive charges which are not the insurance companies but rather the cost of medical devices like $28,000 pacemakers ( intels newest and most powerful computer chip for average retail customers ) can be had for under $300. A titanium hardware screw or bolt at Home Depot might cost $1.25 but the same basic type medical product will bill around $1,250 when used in surgery. Look into Knee or Hip Relacement parts. And yes as another pointed out Doctors malpractice insurance cost in the uSA have always been high due to America jury jumbo dollar awards.

Can we drop the standard party-lines and death panel talking-points to listen to America's frontline business and workers? Both are saying WE CAN NOT AFFORD HEALTH CARE COST.

 
At 10/24/2009 10:40 PM, Blogger QT said...

BM,

You make some good points regarding exec. compensation, however, Home Depot does not sell bio-compatible grade hardware ie. hardware that the body does not reject.

As the Brits would say, the other one plays Annie Laurie.

 
At 10/24/2009 11:01 PM, Blogger Michael said...

I think your numbers are off. The 2009 family average is $6,300 and most plans have pretty comprehensive coverage.

If CEOs are committing fraud they should get serious time and directors and major shareholders should be on top of compensation packages.

As for the cost of medical devices. A run of the mill titanium bolt will run $10. Bio titanium is more expensive, but you need to keep in mind that there are very few ways to work titanium.

I couldn't find a pacemaker that costs more than $3,000. The average cost for a pacemaker and implantation is $10,000.

If you want to bring down costs, insurance should be for major medical expenses. Everyday medical expenses should be out of pocket. But this is not the system we have. We have a 50 state system setup by the fed so state politician can milk money from the "favored" insurance companies willing to go along with the thousands of mandates imposed on them.

Drop the mandates and let insurance companies cross state lines and Cato puts rates dropping a third. Ad loser pays tort reform and rates could drop more than 50%

 
At 10/26/2009 9:35 AM, Blogger QT said...

Michael,

Completely agree that dropping 50 different state mandates and allowing consumers to pay for everyday stuff with coverage of the major expenditures would drop insurance prices enormously. By changing the way people consume healthcare, costs would likely be reduced or held in check.

While I agree with you completely on the above as well as echoing the need for tort reform, I disagree with the comparision of titanium hardware available at Home Depot to medical hardware for the following reasons.

WRT titanium hardware, the production run for medical use is very small compared with the volume for general use. This is very specialized hardware and quite different from commercial grade hardware not only in its metalurgy but also in its design. Note the very coarse threads for holding together living bone tissue which a regular thread would chew through.

Unfortunately, it is difficult to see from photos how different this hardware is from anything that you see at Home Depot, Lee Valley or any specialty hdwe store. It is however not surprizing that a niche market, bio-compatible grade, specialty product cannot match the cost of a lower grade, mass marketed, mass produced product.

 
At 10/26/2009 12:52 PM, Blogger Michael said...

QT,

That was my point on titanium. BMWright was writing that titanium products could be picked up at Home Depot for a buck. Machine grade titanium is $10 to $100 per bolt.

But this isn't bio grade titanium which is much more expensive. The point I was trying to make is that not only is the material more expensive, but that there a very few manufacturing processes that can be used to make a titanium product which also makes them more expensive.

A bio titanium pacemaker case is expensive not because of greed, but because it takes special tooling and man hours to make. Plus the testing for defects and the limited run of the product.

 
At 10/26/2009 2:04 PM, Blogger BMWright said...

Micheal, you need to examine the facts. Now I agree prices can very widely based upon what is need and if it's a ICDs or basic Pacemaker. But here is the healines from a 2003 business report:

Medtronic and St. Jude: Pumping Profits:

Cardiac-rhythm management devices are giving new life to their stocks. New investors, however, may not get much lift

#1. Your wrong about the average cost of ICDs & pacemakers ( unless you got your numbers from a junk yard, China or India) No question the cost can vary widely based upon what you need and what needs to be done. Here are the words from a medical report published by a Blue Cross/Blue shield website responding to questions on why medical bills are high...it's not a position paper it's just explaining to insureds why Insurance Prems. are high:

"The pacemakers range in cost from $35,000 to over $45,000. The additional cost of the procedure with associated medical care varies greatly depending on the place that the person receives the pacemaker. In an outpatient setting, where the procedure is done on the same day of discharge or the day prior to discharge, the average cost is over $2,000 plus the cost of the pacemaker. However, in the inpatient setting, where you are admitted to the hospital, the average cost is over $60,000 plus the cost of the pacemaker".

A similiar website for AETNA makes this statement (2009):

In the United States, about 200,000 pacemakers are implanted each year. In addition, approximately 175,000 pacemakers are replaced, removed or repaired each year. Based on data from the U.S. National Institutes of Health (NIH), the current average cost of a pacemaker in the United States is more than $10,000.

Here is another fact from another report source:

"..the heart-rhythm market, which includes pacemakers and defibrillators, or ICDs. Chief Executive Ray Elliott said Tuesday that pricing in that market "did worsen a little bit." Top heart-rhythm devices can cost more than $30,000 in the U.S."

In a 2003 report from a leader

#2. Your wrong about the average GROUP HEATH CARE INSURANCE PREMIUMS charge per family on the plans like mine. I know what I pay and what the employer pays. I'ts been published annual in our employee benefits report. You can't take what the employee pays and not count what the employers pays. You must take the total cost paid to the insurance company annually. Currently for our plan AET or UNH collects over $14,000 annually for a family of 4.

 
At 10/26/2009 11:16 PM, Blogger Michael said...

I'll give you the price of a pacemaker. I did come across a couple of troubling subjects. One was the cost of a pacemaker and the surgery is priced to the value of a persons insurance.

The other as was referenced by Consumer Reports was that vets use the same pacemakers in pets as used in people but for 1/10th the price. Not that people are pets, but if a $3,000 pacemaker for my pet costs me $30,000, where the hell is the money going?

I'm not going to dispute what you pay in insurance premiums but it's mind boggling the cost is more than double Ohio's average.

 
At 10/30/2009 7:05 PM, Anonymous Mr. Econotarian said...

The cost of any medical device has to include the costs of FDA regulation.
21 CFR 814 for pre-market approval by the FDA,
21 CFR 820 for quality guidelines, plus much more!

 

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