Health Insurance Profits May Be Small, But Are An Easy Target

Profits, it seems, is the eye of the beholder. What to one person seems meager appears to the folks next door immorally exorbitant. When it comes to health care reform there are many who perceive the profit margins of health insurance companies are obscene. The politicians and pundits sharing this belief can be viewed with frequency stating their case. It almost seems that they consider the main goal of health care reform as a means of punishing greedy health insurance companies. (That’s not the case, they care about access and affordability, too, but it sometimes does look that way). These are many of the same folks who forget that health insurance premiums are driven by the underlying cost of medical care. It is, after all, so much easier to just attack villains raking in obscene profits than to discuss complex issues like restraining overall health care spending in the country.

A number of sources are beginning to question the math of these carrier critics. The Associated Press, for example, ran a story Sunday noting that health insurance profit margins “typically run about 6 percent, give or take a point or two. That’s anemic compared with other forms of insurance a broad array of industries ….” Among the statistic the Associated Press brings to light:  “Health insurers posted a 2.2 percent profit margin last year, placing them 35th on the Fortune 500 list of top industries. As is typical, other health sectors did much better — drugs and medical products and services were both in the top 10.”

Of course, last year was a bad year for a lot of industries profits, but some did quite well. Tupperware brands had a profit margin of 7.5 percent, Hershey 6.1 percent, and the folks who own KFC, Pizza Hut, and Taco Bell earned profits of 8.5 percent.

Another reality check raising doubts on how critics evaluate health insurance profits was published recently by PolitiFact.com. Senator Jay Rockefeller in September claimed “Insurance companies have seen their profits soar by more than 400 percent since 2001,” but the award-winning site, sponsored by the St. Petersburg Times, labels Senator Rockefeller’s charge a half-truth — an in my mind, that’s being kind. The problem with Senator Rockefeller’s statistics is the data is flawed. Senator Rockefeller’s statistics are based on an analysis conducted by Health Care for America Now. They examined profits between 2000 and 2008 of just 10 companies. (Interestingly, Senator Rockefeller cites just the change in profits from 2001-to-2007; if he had used 2008 the rise would have been 249 percent, not the 400 percent he claims).

In analyzing the profits of the big 10 carriers, however, the study ignored increases in profits resulting from carrier consolidation. “When big companies absorb smaller ones, the net effect may be to enlarge the profits of the biggest companies … even as the total size of the health insurance industry — the broader entity that Rockefeller seemed to be referring to — stays roughly the same.” This is more than a little problem as not all those smaller companies are truly “small”  (consider WellPoint’s merger with Anthem). This flaw alone makes any conclusions based on this study open to question.

Some will argue that, when it comes to health care, any profits is immoral. Yet profit exists throughout the system: doctors, nurses, hospitals, pharmaceutical companies, device manufacturers, and others all make a profit (or at least earn a living) from the medical services and products they provide. There’s nothing special or unique about carrier profits. Except that people like doctors and nurses and don’t like health insurance companies.

Instead of focusing on insurance carrier profits, industry critics would make a more significant contribution to the debate by broadening their inquiry to carriers’ administrative costs. This would lead to a more nuanced discussion on the value of expenses such as disease management, marketing, customer service, technology investments, taxes, regulatory compliance costs and, yes, profits, among other expenses. And it would require a discussion of what is an appropriate level for these non-claim costs. Here, I would suggest, the true measure of excessive costs is a carrier’s ability to bring health plans to the market that consumers buy. Carriers unable to control their administrative costs are unlikely to be able to compete long-term — another, more efficient carrier is likely to emerge and capture market share. (Yes, I know that in some states there simply isn’t enough competition among health insurance carriers for competition to work its magic, but in many states there are — and solutions can be found for where it is inadequate).

My point is not that anyone should feel sorry for the relatively low profit margins earned by health plans. Nor am I suggesting that it is unfair to question how insurance companies operate as part of the health care reform debate.

What I’m asking for is a broader examination into all contributors to the cost of health care in America, including looking at how the dominant fee-for-service method of reimbursing doctors and other medical providers, the  near monopolies enjoyed by some hospital chains in many regions of the country, the disparity between prices drug companies charge in the United States versus oversees, and the how medical malpractice and government regulations add to the cost of health care.

Because at the end of the day health care reform will be judged not by its impact on health insurance company profits, but on whether Americans can afford their health insurance coverage.

9 thoughts on “Health Insurance Profits May Be Small, But Are An Easy Target

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  3. Dear Friends and Relations,

    I hope I won’t offend any of you by writing to express my anger about reports we read in UK papers about the distortions and downright lies concerning the British National Health Service (NHS), propagated by the enemies of your President. I hope you will feel able to copy this e-mail to any friends who are against Obama’s proposals for health reform.

    It is particularly galling to hear that the utterances of an idiot UK Member of the European Parliament are being quoted as gospel. The man concerned (whose name I can’t recall and of whom we had never heard until this episode) is clearly far to the right wing of the Conservative party and his views have been disowned by the leader of that party.

    No health service is perfect because it depends on people to run it, and to err is human. When it runs well, it is not “news”, but the occasional failures and problems hit the headlines in the right-wing press.

    There are also issues about how to handle leading edge and expensive technology. New technology has to tried and tested, but when it is both new and expensive, choices have to be made about the initial use of it in designated centres of research. This always gets into the papers because patients who just might possibly have their lives prolonged by a new treatment, understandably want it NOW. I know this would be my own gut reaction. But if logic suggests that the money (which is not infinite in any system) could be more cost-effectively used for other more proven treatments for many more people, then I have to agree that it would not be sensible to for me to get the experimental treatment. I used to draw the comparison between kidney and heart transplants. It is probably cheaper now, but a few years ago one could save the lives of many people in kidney failure for the cost of one heart transplant. The experimental technology eventually becomes cheaper and routine, a fact that I am heartily glad about.

    It seems that the anti-brigade have latched onto this concept to say that the NHS rations care and dictates who shall live and who shall die. That is a crude nonsensical interpretation of the facts and must be contrasted with cases in the US where people don’t take the drugs that would save them, because they cannot afford them.

    May I also point out that the USA spends twice as much as the UK per head of population on health care, and yet you have a worse life expectancy and perinatal mortality rate than us. I read recently that your perinatal mortality rate was far worse than the much-vilified Cuba. How ironic that the bete-noir of the US right wing should actually give its infants a better life chance, in spite of years of economic isolation. In fact, Cuba trains so many doctors and para-medics that many work in other third-world countries.

    How much of the money spent on health care in the US goes into the profits of the insurance companies and the profits of the private health facilities? And yet I read that 50 million Americans are without health insurance and rely on a dodgy and inadequate back-up system. How many more have insurance limited because they have a pre-existing health problem? How many more have health insurance through their job and so dare not change jobs?

    What would my recent experience of the NHS have cost in the USA?

    For those who don’t know, one day back in March this year, I fainted at our Local History “club”. The emergency number was dialled and our local stand-by para-medic in a fast car was there within minutes, shortly followed by an ambulance which took me to the local hospital. No questions about insurance, because we are all looked after by the NHS. All sorts of tests and scan were done and the doctors discussed the findings with doctors at the main teaching hospital in Leeds. It was decided that I should be transferred to Leeds, about 10 miles away.

    The transfer to Leeds under flashing lights and siren was about the only thing about the following two weeks that I can still remember. I think the ambulance men were anxious that I didn’t die on them, hence the flashing lights etc.!

    At the Leeds General Infirmary, they did more tests, and told Helen that they were reluctant to operate because it was potentially so difficult and hazardous. I am told that I was quite chatty that weekend, but on the Monday I collapsed again and they decided that surgery was urgently necessary. Helen was visiting and talked with the surgeon before he started 13 hours work on me. They replace my aortic valve and a section of the ascending aorta. I was then unconscious for 5 days in Intensive Care before gradually being brought round. There was a setback 4 days later, when they had to take me back to theatre to remove some clotting round the heart; but that went well and three days later I was moved to the ordinary ward from where I went home 10 days later.

    I like to joke that, if the new parts last half as long as the originals, I will live to 105!

    A few days after I got home, the cardiac rehabilitation nurse came to visit me (all part of the service), and I was advised to take graduated gentle exercise and invited to attend the Tai Chi classes at the local hospital. I am about to graduate to a more strenuous exercise class at the hospital (all available free), but as some of you know I can already do modest 2 or 3 mile walks.

    I am on Warfarin (I call it rat poison) to prevent clotting, and my blood has to be tested regularly to get the dosage right. It now seems to have stabilised so that is now being done at 4 week intervals whereas earlier it was weekly. I am also on two blood pressure reducing drugs, making 7 pills a day, all free of course. I would have to pay something for medication if I was aged under 60 and over 18 and had an income.

    Contrary to what is being put about by President Obama’s enemies, the treatment I had was exemplary. Every single member of staff at the hospitals was superb. Even the orderlies who dished out the food did their best to cheer me up and get me eating. Something, either the anaesthetic or being on the by-pass machine, had spoilt my sense of taste, so most food either didn’t taste of anything or was slightly revolting. Fortunately that has passed and food is nearly back to normal. But the whole atmosphere on the wards was cheerful and encouraged one to push oneself to get better. So it annoys me intensely when people opposed to your proposed health care reform claim that the NHS is failing. It is a lie.

    The NHS is superb. I hope you get something like it soon.

    In the UK, we are not forbidden from take out supplementary health insurance. We ourselves actually have it, mainly so that we can get privacy when we need it for minor procedures, and so that Helen as an ex doctor is not in the embarrassing position of potentially being treated by staff she worked with. But it is really rather a waste of cash, because, when the chips are down in a serious emergency, the NHS gives us everything we need.

  4. Profit has become a bad word. This is rediculous. The issue with health insurance premiums being high has little to do with the insurers jacking up the rates for profits and everything to do with the variables that are ever increasing because of fraud and unethical lawsuits. Fix the fraud in the health industry and pass Tort reform. This would go a long way to deflation in the healthcare industry.

  5. i believe to much emphasis is being put on profits of the insurers. If you want to reform health care you must come up with a plan to reduce cost across the board. I have worked in the medical instrumentation field and I see companies selling items for $200.00 that cost about $3.26 to produce fully loaded. This plan that is being proposed is about the availability of health care and does little to address cost. The same thing happened in Massachusetts. Premium costs are expected to increase each year because all they did was mandate coverage and nothing to control cost.

  6. Targeting health insurers profits is short sighted and ignorant. There are many ideas floated by independents and republican alike that seem to make the most sense to me:
    1. A national insurance marketplace which fosters more competition
    2. Tort reform – eliminates defensive medicine and frivolous lawsuits,, lowers malpractice premium.
    3. Support for CDHC which puts the consumer in the driver seat in shopping for the best deal among providers.

  7. Your last comment is the key: can Americans afford health insurance? Attacking health insurance profits is mostly a distraction from the real challenge of how do we control the runaway medical trend. Even if we eliminate insurance company profits of 2-6%, we will not have addressed the 10% annual medical cost trend, which is the ultimate problem.

    But if you really want to go after high profit margins, take a look at Highmark Blue Cross. They have over $3.5 billion in reserves, yet one of the highest declination rates in the country. And it is technically a not-for-profit. Go figure. This is a Pennsylvania Department of Insurance asleep at the switch.

  8. Here’s another Amen!!

    I have posted and told clients and friends that there is no such thing as health insurance reform without health care reform. It’s the sum of all of the parts. If Congress insists on taking it all out on the insurance industry the industry will learn to say NO more often to higher payments to hospitals, pharma and docs. They will say NO to border procedures. This will only further paint them into a corner as the bad guy but it is essentially doing what the government has failed to do.

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