Just for fun, I hit up Yahoo Finance and pulled up some profit margins for a few health insurance companies. People are quick to point out how many hundreds of billions of dollars in profits a health insurance company makes, but people fail to recognize this in perspective of revenues and expenses. Profit margin is a measure of this ratio.
Wellpoint (Blue Cross Blue Shield) 3.83% Humana 3.13% United HealthCare 4.2%
It appears the median profit margin is around 4% for health insurance companies.
Then I pulled up two large defense contractors that get 90% of their business from the US Government. The important thing to note is that these contracts run almost exclusively on "cost-plus" contracts, arranged such that they are guaranteed a fixed profit on the contract. The payment they receive is the "cost plus" a pre-defined industry standard profit margin. It doesn't matter whether the contract is worth $100M or $100k, the contractor gets X%.
Raytheon 7.7% General Dynamics - 7.5%
It appears that the government thinks its OK to give defense contractors a profit margin that is almost double that of health insurance companies. The government is the only buyer from these contractors and has a lot of power. If the government believed a 4% profit margin would be "fair" they would require the cost-plus contract be given according to those terms. Clearly the government believes 4% is half as much profit as a company deserves to make in profits.
Message edited by: tripleB on 2009-11-09 13:33:59 CST
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I'm playing devil's advocate here, but I think one of the knocks against the insurance cos is that they are woefully inefficient. I'm not going to pull their P&Ls, but my guess is that G&A expenses make up a huge portion of that P&L which would drive down their profit margins.
In theory, at least, if they were able to do the same job more efficiently, prices of premiums would decrease.
ceobeaver said:I'm playing devil's advocate here, but I think one of the knocks against the insurance cos is that they are woefully inefficient. I'm not going to pull their P&Ls, but my guess is that G&A expenses make up a huge portion of that P&L which would drive down their profit margins.
In theory, at least, if they were able to do the same job more efficiently, prices of premiums would decrease.
If it were possible to do the job more efficiently, then why wouldnt a new entrant come into the market and make ridiculous sums of money?
tripleB said:ceobeaver said:I'm playing devil's advocate here, but I think one of the knocks against the insurance cos is that they are woefully inefficient. I'm not going to pull their P&Ls, but my guess is that G&A expenses make up a huge portion of that P&L which would drive down their profit margins.
In theory, at least, if they were able to do the same job more efficiently, prices of premiums would decrease.
If it were possible to do the job more efficiently, then why wouldnt a new entrant come into the market and make ridiculous sums of money?
High barriers to entry. Insurance is an economies of scale industry, since larger client pool means less risk. There's a reason Buffett made his money in insurance.
BTW, net profit margin is the wrong metric. Insurance is all financial, so of course the margins will be thin. What you want to list is Return on Equity (ROE). That let's you know how profitable investment in an industry is. Repost those figures and the result may surprise you. (Or not, I didn't look it up myself.)
High barriers to entry. Insurance is an economies of scale industry, since larger client pool means less risk.
Investment capital is NEVER a barrier to entry. You can always get people to pool together investments if the business will be profitable enough on the risk-reward scale. Barriers to entry include some valuable unimitable resource or government regulation blocking new entrants.
enc0re said: BTW, net profit margin is the wrong metric. Insurance is all financial, so of course the margins will be thin. What you want to list is Return on Equity (ROE).
Low Profits plus high volume is one way to make a lot of money. However if the government creates a public option and reduces volume, then the insurance company's ROE will drop precipitously. I purposely selected profit margin as my metric.
BBB: If it were possible to do the job more efficiently, then why wouldnt a new entrant come into the market and make ridiculous sums of money?
because Medical insurance isn't a free market. There are a tons of regulations which vary state by state. One of the suggestions which has been proposed is to remove some of the regulations and free up the market. However, I don't want to steer this thread towards the politics of the numbers.
Message edited by: ceobeaver on 2009-11-09 14:39:39 CST
Maybe we're just more afraid than we are sick? Besides the govt. take over will turn those profits back to the people... Like the US Military did in the Iraq/Afghanistan.
70% of insurance profits go to claims (Loss Ratio) and 26% go to expenses (G&A) this gives you a combined ratio. People want to capture that 26% because medicare only spends about 4%. Plus the insurance companies have a huge incentive to not cover sick people and deny claims which is great in most industries but, usually not so great in life or death issues (healthcare). The numbers are all ballpark but, thats what people who want universal healthcare are getting at generally.
While you are around randomly comparing, how about profit margins of government division of Microsoft contracting versus corporate? At least you won't be comparing apples to porcupines there.
tripleB said:ceobeaver said:I'm playing devil's advocate here, but I think one of the knocks against the insurance cos is that they are woefully inefficient. I'm not going to pull their P&Ls, but my guess is that G&A expenses make up a huge portion of that P&L which would drive down their profit margins.
In theory, at least, if they were able to do the same job more efficiently, prices of premiums would decrease.
If it were possible to do the job more efficiently, then why wouldnt a new entrant come into the market and make ridiculous sums of money?
Because the insurance companies are exempt from antitrust laws. That is one great thing the new House bill does - strips the exemption from the HC insurance industry.
In the penultimate draft of the address, Eisenhower initially used the term Military -industrial-congressional complex, and thus indicated the essential role that the United States Congress plays in the propagation of the Military industry. But, it is said, that the president chose to strike the word congressional in order to placate members of the legislative branch of the federal government.
foghorn19 said:tripleB said:ceobeaver said:I'm playing devil's advocate here, but I think one of the knocks against the insurance cos is that they are woefully inefficient. I'm not going to pull their P&Ls, but my guess is that G&A expenses make up a huge portion of that P&L which would drive down their profit margins.
In theory, at least, if they were able to do the same job more efficiently, prices of premiums would decrease.
If it were possible to do the job more efficiently, then why wouldnt a new entrant come into the market and make ridiculous sums of money?
Because the insurance companies are exempt from antitrust laws. That is one great thing the new House bill does - strips the exemption from the HC insurance industry.
4% is 4% no matter how you look at it. It's low margin business and it always will be. We demand top of the line sevice and lowest premiums. The real barrier to entry is the low-margin compared to the amount of liability they take on. Healthcare, Drug companies, automakers, etc. are all industries that can no longer exist in anything but mega-corporation size to protect themselves from predatory lawsuits. I don't care if they revoke the anti-trust exemptions(because I don't think it will make a diff) but it makes NO SENSE for them to do this while at the same time sneaking in section 2351 of the new, awesome healthcare bill:
section 2531 states "...a state is not eligible for the incentive payments if that state puts a law on the books that limits attorneys' fees or imposes caps on damages."
Classic Kansas city shuffle: They'll have everyone looking at how they saved $10M by retraining 10,000 healthcare admin workers to use imagine software on the right while on the left they increase legal fees by $10M for 10 lawsuits. Apparently attorney's are not expected to take any kind of paycut in these tough financial times. Thanks Dems.
1) You have non-profit players like the Blues (Blue Cross Blue Shield) that have near monopoly in some states (Mississippi and Alabama, for example). When new entrants come in, those blues just lower the premiums so much they the new players cannot compete. Anti-trust, you scream. Hah! I say.
2) There were many, many smaller players but they cannot compete with bigger corps. The reason is that they don't have the scale to offer more competitive products and don't have negotiation powers with the providers. If I am a provider and you can steer 10,000 patients a month, I'll give you a better deal than if you're a chump that can only bring me 500 a month.
3) By the virtual of being small, you are taking much more risks than the big boys. IF you have a couple cases of high claims (say, around 500K- $1 million), you're out of business. How much premiums do you have to collect to make up for that?
They could easily reduce the G&A by pegging a baseline to medicare reimbursement instead of invoking voodoo magics in all their contracts. Claim adjudication is pain in the ass because these contracts are so complicated most people writing them don't know what they're doing.
Message edited by: cr3s on 2009-11-09 16:20:17 CST
What about the absurd bonuses that are paid out for denying people coverage and bankrupting people who in good faith thought that they had bought insurance to cover against ill health? Awful business a s currently constituted. Chers for the House!Profits are absolutely fine....so is morality....
myth465 said:70% of insurance profits go to claims (Loss Ratio) and 26% go to expenses (G&A) this gives you a combined ratio. People want to capture that 26% because medicare only spends about 4%. Plus the insurance companies have a huge incentive to not cover sick people and deny claims which is great in most industries but, usually not so great in life or death issues (healthcare). The numbers are all ballpark but, thats what people who want universal healthcare are getting at generally.The fraud with Medicare claims is much higher than with private insurance.
High barriers to entry. Insurance is an economies of scale industry, since larger client pool means less risk.
Investment capital is NEVER a barrier to entry. You can always get people to pool together investments if the business will be profitable enough on the risk-reward scale. Barriers to entry include some valuable unimitable resource or government regulation blocking new entrants.
The barrier to entry is the size of your client pool not the size of your investment. Read my sentence again.
enc0re said: BTW, net profit margin is the wrong metric. Insurance is all financial, so of course the margins will be thin. What you want to list is Return on Equity (ROE).
Low Profits plus high volume is one way to make a lot of money. However if the government creates a public option and reduces volume, then the insurance company's ROE will drop precipitously. I purposely selected profit margin as my metric. Your original argument was that insurance companies are economically efficient, since their net profit margin is slim. Net profit margin is the wrong metric to use. Simple as that. Mind you, I'm opposed to a public option as well, thinking it will become another bloated entitlement, be eventually tax subsidized, and be subject to the same "vote me a benefit increase" and waste fraud abuse problems as Medicare is now. I'm just stating that your numbers are the wrong ones to support your argument.
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