Sunday, March 14, 2010

Excessive Health Insurance Profits? Insurance Cos. Are the Messengers, Not Source of Higher Costs

Health Insurance Industry Ranks #10 by Profit Margin in the Health Care Sector

President Obama and Health and Human Services Secretary Kathleen Sebelius have recently launched attacks on America's health insurance for making "excessive profits," which they claim have contributed to rising insurance premiums and higher overall healthcare costs. As I have pointed out, the heath insurance industry currently ranks #88 for profit margin (profits/sales) by industry, data here.

The table above compares the profit margins for all of the sixteen separate industries in the health care sector (
data here for the most recent quarter), and shows that Health Care Plans (health insurance companies) ranks #10 out of 16, behind nine other more profitable health care industries, including four drug industries, medical instruments, medical laboratories, and medical equipment.

As Larry Schreiber, president of Anthem Blue Cross and Blue Shield in Wisconsin, said recently "Insurance is expensive because health care is expensive."

So while health insurance companies are an easy political target to take the blame for rising health care costs, it's a little unfair to single them out when even many other health care industries are much more profitable. Health insurance companies are just the messengers of higher health care costs, not the source of higher costs.

Focusing on insurance company profits distracts the public from the real problem with health care, pointed out by John E. Calfee in the Wall Street Journal:

"Health insurers operate in a market in which party one (the patient) is told by party two (the doctor) what products and services to consume, while party three (the insurance firm) pays the bill, and more often than not, party four (the employer) bears the financial risk of cost overruns. That's a tough business environment in which to make money without offending someone."


At 3/14/2010 9:46 AM, Anonymous Anonymous said...

Focusing on the profit margins of the industries is a red herring.

The issue is costs incurred for elements that don't add value (from the supplier side) or costs incured because of the absence of self-restraint that comes with out-of-pocket expense (consumer side).

I can think of one hospital (legally non-profit) that offers new employees 1 months vacation and deliberately over-staffs to accommodate employee absenteeism - practices that wouldn't survive in a competitive market.

From the consumer side, how many people ask how much the doctors visit (insurance + co-pay) will cost? Where is the invisible hand?

Focusing on profits is a distraction from the real culprit.

At 3/14/2010 11:24 AM, Anonymous Frank said...

Where can we donate to the health insurance companies, they put their patients care before their own profit and now thanks to Carpe Diem more people will know that Obama is the bully and demonizing the poor insurance companies.

We should all write our congressman and encourage Anthem/Blue Cross to raise their rates by 100% so they can earn a decent profit.

Damn, Obama for his mis-treatment of Anthem/Blue Cross !!!!!!!!!!!

At 3/14/2010 11:31 AM, Blogger SBVOR said...

Under the present system, virtually all consumers of health care have the (false) impression that somebody else pays the bill for whatever they want to consume. Why is anybody surprised that such a system would cause prices to skyrocket out of control?

Politicians -- who created the present mess -- now swear that more hair of the dog that bit us will fix what they broke. It’s sheer insanity -- as always.

Treating health care and health insurance as an entitlement is what brought us to this point. The continual expansion of that sense of entitlement will only make matters worse.

Click here and here to expand upon these comments.

At 3/14/2010 11:47 AM, Anonymous Nicolas Martin said...

"Medical practitioners" at 0.1 percent? If that included physicians, it is impossible to believe.

At 3/14/2010 11:56 AM, Blogger SBVOR said...

Nicolas (3/14/2010 11:47 AM),

As you would know if you followed the links, Medical Practitioners refers to publicly held companies who provide that service (and pay -- as an expense -- the salaries of the physicians they employ).

Those Medical Practitioners who are foolish enough to accept Medicare and/or Medicaid patients see their profits disappear down that rat hole.

And, all their other patients make up the difference. It boils down to yet another hidden tax to subsidize Medicare and Medicaid.

At 3/14/2010 12:05 PM, Anonymous Anonymous said...

Return on Equity is not profit, it is an indicator of efficiency and has nothing to do with profit margin. It also does nothing to explain why President Obama is cutting deals with Pharmaceutical companies while accusing the health insurance companies of gouging their customers.

At 3/14/2010 12:26 PM, Blogger SBVOR said...

Anonymous (3/14/2010 12:05 PM),

But, don’t you understand? To the emotionally driven, any number that looks damning IS damning. The relevance of the number is, well, irrelevant. ;-)

As an accounting layperson, I would say that insurance companies inherently have lower amounts of equity. Therefore, even low profit margins tend to produce higher ROEs.

At 3/14/2010 1:46 PM, Blogger SBVOR said...

Anonymous (3/14/2010 1:21 PM),

You incorrectly place the blame on insurance companies.

Government intervention is to blame, beginning with FDRs wage and price controls (which literally made it illegal for employers to offer competitive wages). Employers found the loophole -- offering health insurance in lieu of better wages. That was the beginning of the end. That was the moment when the consumer of health care services was divorced from the one who paid the bills. And, that was the moment when we lost any hope of ever containing costs.

But, our fate was truly sealed in 1965 when LBJ signed Medicare and Medicaid into law. That was the moment when the fate of the entire country was sealed. Unless voters begin to demand dramatic reductions in existing entitlements, our country will -- per the non-partisan CBO -- utterly, totally and completely collapse within my lifetime.

Unfortunately, the American appetite for entitlements will continue to grow in blissful ignorance until the moment of the inevitable collapse.

Click here and here and here to expand upon and fully substantiate these comments.

At 3/14/2010 7:43 PM, Blogger W.E. Heasley said...

Mr. Perry’s over arching point is that the class warfare argument and subsequent demonization of a specific party within the class warfare argument is rarely if ever based on empirical evidence.

The argument put forth by Obama and his progressive/socialist followers regarding health insurers is merely a classic, tired, over-cooked, and empty version of the class warfare argument. The claim that insurers have huge profits is not based on empirical evidence. To be blunt, their argument is based on imaginary claims.

It’s a classic Thomas Sowell discussion of the self appointed intellectual using verbal virtuosity in place of empirical evidence. It’s the “way things ought to be” argument with the intelligentsia merely making the insurance companies the big bad villain standing between you and “the way things ought to be”. It’s a version of the class warfare argument between you and the insurance company.

At 3/14/2010 10:13 PM, Blogger SBVOR said...

Anonymous (3/14/2010 10:01 PM),

1) Okay you’re full of hatred and class envy for insurance CEOs -- got it.

2) If each CEO was paid nothing and the savings went directly into premium reductions, how much do you calculate you would save each year?

3) Shall we assume you favor 2,700 pages of abject tyranny, brazen corruption and endless bureaucracy which -- by the way -- includes a federal mandate that we all purchase insurance from your hated CEOs?

At 3/14/2010 11:37 PM, Anonymous Anonymous said...

A commercial which you may (or may not) hear on late night TV.

Can't sell your health care takeover bill??? Is passing your Obamacare getting to be a pain in your posterior or becoming an pain in your head???

Well, just choose someone or some organization to demonize and spread hate and mis-information about to manipulate and fool the uninformed and sleeping American populace.

You too can win the healthcare fight - just ruthlessly follow the playbook from "Rules for Radicals". Just two payments of $49.95 and $10 shipping and handling. Get yours today and win!

Back on topic -

1) I'd like to know how many of my healthcare dollars (including my health insurance) goes to subsidizing healthcare of others.

1a) How much of my healthcare spending goes to make up for provider losses in treating indigents? How much for illegals who shouldn't even be in the US?

1b) How much more goes to make up for provider losses caused when the Medicare or general medical assistance payments are less than the cost of delivering the service.

2) How many of my healthcare dollars are spent for defensive medicine, duplicate tests and malpractice insurance?

3) How many of my healthcare dollars is spent on state and federal government reports/paperwork/etc. that adds no value to me and how much more is spent to fulfill mandated coverage that I neither need nor want, but some bureaucrat says I must have it.

I suspect that half my healthcare spending is eaten up in the items listed above.

And for the record, I DO ask about the cost of services, whether the service is necessary and whether there are cheaper alternatives for meds.

I agree with SBVOR - when the cost of healthcare is not borne by the consumer and is treated as an entitlement, the consumer will demand as much as they can get rather than what they truly need.

While I stop short of calling for the consumer to pay 100%, employers and insurance carriers have instituted copays and the employee share of the insurance premiums have been increased - both work to encourage consumers to use healthcare dollars carefully.

But I don't see government doing that with general assistance medical or with Medicare.

But regardless of the above discussion - all of the big entitlement programs are essentially broke and are on a collision course with reality. We have all these liabilities such as Social Security and Medicare growing, yet there's no funds backing up those liabilities. This is not sustainable.

Adding Medicare Part D just added to the unsustainability.

Adding in Obamacare adds to the looming disaster.

Of course I won't be around, I'll be an old person with health problems who will be forced to die without care or will be euthanized due to rationing of care because there isn't enough money.

At 3/22/2010 5:36 AM, Anonymous Anonymous said...

While I am not in favor of Pres. Obama's use of demonizing any particular industry, the report of the insurance industry having a 4.4% profit margin is illusory.

The insurance industry is a service industry who's charge is to manage health care dollars. For this service they charge approximately 20% (80% being paid out for Health Care). Of that 20%, 20-25% is profit (4.4% of the total).

The Insurance industry is doing fine.


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