Thursday, February 18, 2010

Health Insurance Companies Rank #88 by Industry Profit Margin, Earning $100-200 on Avg. per Policy

I've posted several times before about the profitability of the "Health Care Plans" industry, see posts here and here, and reported previously that the health insurance industry ranked #86 by profit margin out of 215 industries, at 3.3%.

Updated data are now available
for Q4 of 2009, and the Health Care Plan industry (includes Humana, Aetna, WellPoint, Magellan, Unitedhealth Group, etc.) slipped to #88 with a profit margin of 3.4%. Actually, that industry profit margin was boosted by WellPoint's 18% profit margin for Q4 2009, which was due largely to a one-time sale of its Pharmacy Benefit Management division. Without that sale, WellPoint's profit margin would have been only 3.9%, the industry average profit margin would have been closer to 3%, and the ranking for the industry would have fallen a few places down to #92.

America's Health Insurance Plans (
AHIP), the industry's trade association representing 1,300 members, reported last October 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 3.4% means that insurance companies make about $100 per policy in profits for individual coverage, and a little more than $200 in profits for each family policy.

So even if we could strip away 100% of the health insurance industry's profits, it would only save patients between $100 and 200 per year in health insurance costs.

16 Comments:

At 2/18/2010 10:23 AM, Blogger Paul Stagg said...

And that savings assumes the profit motive doesn't drive any efficiency.

I'm pretty sure it does, or we wouldn't need these companies in the first place.

 
At 2/18/2010 10:27 AM, Anonymous Anonymous said...

Also, they are 59th in return on equity at 13.1%

 
At 2/18/2010 10:50 AM, Blogger James Fraasch said...

Great post.

I always find it amazing when someone introduces or discusses an "excess profits tax".

There is no such thing as an excess profit.

Profit margins for the software industry far outstrip health care and oil. Yet nobody out there talks about jacking up taxes on the obscene profits made by Microsoft.

James

 
At 2/18/2010 2:06 PM, Blogger Marko said...

Thanks for the great post, I wish this would penetrate the national consciousness. The problem with the current system is the cost of health care, which is the reason health insurance is so high. Rather, it is subsidized insurance that is making health care more expensive.

What we have here is just another case of government intervention causing a problem, and then government using the existence of the problem to justify additional government intervention. Call it Marko's Maxim.

 
At 2/18/2010 5:20 PM, Blogger Benjamin said...

Blue Cross of California wants average 25 percent rate increases.

I wonder how long until the public demands affordable care--the private sector obviously cannot do it, at least when forced to provide too many benefits, including keeping old people alive past the expiration date.

 
At 2/20/2010 2:30 PM, Anonymous Gary said...

Reality Check!

Consider that 30% of all insurance premiums are paid back out in commissions. In other countries a 15hr admin person signs people up. A 20% savings.

Another 20% is spent in efforts to NOT pay claims.

That is admin costs in the US average 25% of all premiums and world average is 6%. They have teams of analysts and lawyers hand processing all claims to find a way out. In other countries they are just processed by administrative personnel and a lot of it totally electronic (never viewed by human eyes). One dollar in every five we/our employers pay is waisted trying not to pay our claims.

The industries 3% profit is also after they pay executive compensation of 3%-5% of premiums to the top 10 executives. CEO of Atena last year made 25 million. That’s over 400K a week. Prior to exec comp they earned 6% last year. A year they lost more subscribers than in any year in history and the execs took half it (3%).

Also during good economic times more healthy people carry insurance. During bad times...like these, the less healthy tend not to drop coverage and the healthy do. This cuts their profits in times of high unemployment. When unemployment was at is lowest sense the 2001 recession in 2006 the industry earned 7.1% (after exec comp, was more like 12% before) profit and their sector ranked as the 21st most profitable.

Add it up, 20, 20, 7, 3=50%. Now do you know why other countries pay 50% less that we do? That is 8% of GDP compared to our 16%.

This article trys to make an argument that doing away with the for-profit insurance industry, or seriously reform it, will only save us $100 per person a year. So why bother? The problem does not seam to be the insurance industry!

I have worked most of my life in teh insurance indusrty. Believe me, it is.

 
At 2/21/2010 5:43 PM, Anonymous Skeptic10 said...

Gary,

Your numbers don't seem to make any sense when one compares to public information. If you worked in the insurance company, my guess is that it was not as an actuary. The best argument you make for eliminating the current system is that it apparently employs you.

I don't think CEO of Aetna is worth $3M a year, but that was his direct compensation in 2008. 2009 Compensation hasn't been announced yet. Direct compensation is what you can tie to premiums. Stock awards which is where these guys make the real money is based on investors not premiums. Also, you seem to be ignoring that 70-80 percent of premiums are spent on benefits - see California state law for insured plans (they require at least 70%). Also at least half the market is self-insured - insurance companies get admin fees for this not premiums. Not sure where you are getting the 50% spent on care. If you're going to make an argument, it would help if you used facts.

 
At 2/21/2010 5:44 PM, Anonymous Skeptic10 said...

Gary,

Your numbers don't seem to make any sense when one compares to public information. If you worked in the insurance company, my guess is that it was not as an actuary. The best argument you make for eliminating the current system is that it apparently employs you.

I don't think CEO of Aetna is worth $3M a year, but that was his direct compensation in 2008. 2009 Compensation hasn't been announced yet. Direct compensation is what you can tie to premiums. Stock awards which is where these guys make the real money is based on investors not premiums. Also, you seem to be ignoring that 70-80 percent of premiums are spent on benefits - see California state law for insured plans (they require at least 70%). Also at least half the market is self-insured - insurance companies get admin fees for this not premiums. Not sure where you are getting the 50% spent on care. If you're going to make an argument, it would help if you used facts.

 
At 2/22/2010 1:29 AM, Anonymous Gary said...

True the CEO got most of his pay in stock options in 2008 and did not exercise any. In 2007 he exercised $40 million of those. Without shares in treasury that pretty much becomes a direct payment by the firms when exercised.

California is the ONLY state that requires a payout minimum. Which is 70% of premiums. To say the other 49 states insurers operate in average 50% I admit is a stretch. More likely closer to 60%.

 
At 2/22/2010 2:42 PM, Blogger Robin said...

"Blue Cross of California wants average 25 percent rate increases." And I want a 25 percent pay increase. Asking ain't getting.

And people (or their employers) can vote with their feet. There are many choices in California.

Besides, we have to look at more years than one to prove a trend.

 
At 3/12/2010 2:12 PM, Blogger Jack said...

The issue isn't how much profit insurances companies take out of medical care, it's the total cost. You didn't mention how much they spend processing claims, arguing that the treatment isn't covered or that some other kinds of insurance, like workers comp, is responsible for the cost.
The real issue is that insurance isn't the right economic model for providing people with health care.
If profits for medical insurance companies are slipping, it supports the point.

 
At 3/13/2010 4:56 PM, Anonymous ulTRAX said...

It's a red herring to focus on health care profits without mentioning the greater inefficiencies of our for-profit health care industry. For instance, the US pissed away in 2004 some $465 per person just on health care administration. Source: “U.S. Health Care Spending:
Comparison with Other OECD Countries” by the Congressional Research Service.
http://assets.opencrs.com/rpts/RL34175_20070917.pdf
The medium of the nations studied was only $66. That could mean $120 billion in savings in the US or about $2660 for every one of the estimated 45 million uninsured. Now add to that profits, high executive pay/perks, and advertising... and we can see where this wasteful “competitive overhead” is just draining money away from providing real health care.

 
At 3/22/2010 10:02 PM, Anonymous Anonymous said...

i also work in the healthcare industry and it isn't insurance that drives the cost--it is the cost of HEALTH CARE--the drugs, the tests, malpractice insurance for the docs, covering hair transplants, etc. if a mandate was made for everyone to have bare bones insurance--that would make sense. cost containments aren't really addressed in the health care bill passed by the house.

 
At 3/29/2010 11:19 AM, Anonymous Anonymous said...

Gary - During hard economic times, people that have health care tend to use it more because they are unsure how long they will be employed. All insurance companies are seeing an increase in submitted claims. What people need to look at are the costs involved for malpratice, costs from drugs and the bigest kicker are the hospitals.

 
At 5/16/2010 7:34 AM, Blogger brian said...

Good discussion. I'd like to add some points; the California law requiring 70% premiums be spent on care actually has big loopholes. It says the money has to be spent on "related activities" which the industry has used to create "quality improvement programs" that are really administrative efforts to deny care but get included in the 70% of supposed care costs. Thus the industry still only spends close to 50% of the premium on care in California.

Also, when the point is made that at least 50% of the premium goes to hospitals, doctors, and medicines let's not forget that, well that's the whole point of health insurance. Of couse it goes there and of course its expensive. As far as benefit goes, the average life span has increased 40 years (!!!) In the past century. Chlidren born today are expected to live till they are 101 years old. That level of care and expertise is not cheap. Also, the US subsidizes care overseas tremendously by bearing all of the innovation costs which are limited or prohibited in Europe. Thus the very false claims that Europe does the same level of care cheaper are false. There are obvious fixes to this problem, but dropping the fees we pay to the health care workers who provide this amazing level of care and innovation is penny-wise and pound-foolish: we'll simply loose the talent and effort to other industries and in the end our health will suffer.

Brian Broker, MD
Bbrokermd@aol.com

 
At 10/21/2011 4:19 PM, Blogger TruthSeeker said...

Mark has written an excellent article and there is a lot of good discussion here. I think the best point someone made however is that it is not the "Profits" that make Healthcare unaffordable. The issue is that it is dispensed by a for profit business model. Far more money is spent in advertising and efforts to reduce claims than what is made in profit. There are so many ways the system could be more cost effective it is a travesty that it is still broken. The saddest fact about the system is that we all know it's broken, yet no one has the political courage to step forward to do something about it. I give credit to any who have tried.

 

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