Profit Margins of Health Insurance Companies In Perspective

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.

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.

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.)

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.

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.

God bless America!

How much less would healthcare cost without HIPAA?

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.

Well then I guess that UnitedHealth and Blue Cross should start building tanks! Problem solved.

There aren't more competition because

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.

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.

hmmm one kills americans the other kills foreign citizens......profits either way!

BTW i think both should make less profits and the relative associative comparison / justification by OP is ridiculous.

tripleB said:

Then I pulled up two large defense contractors that get 90% of their business from the US Government.

Are they getting paid?

Our local hospital is owed $200M from 2006 & $300M from 2007 from medi-cal & medicare payments. Seems like they aren't even getting paid. But they did turn a $20M profit mostly by charging regular customers more.

Xnarg said: There is a disconnect here in the arguments of those who think a Medicare-style approach to health care insurance is superior.

On one hand, they point to the low administrative expense rate for Medicare. They say the higher expenses associated with private insurance firms is a waste.

On the other hand, one of the key provisions in the current health care proposal is to cut out the fat in Medicare and use that extra money to fund the new program.

If Medicare is so efficient, then there would be no fat to cut out. But there is, apparently.

Which is it?I think they are both true. The administrative overhead is low. But medicare also spends lots and lots of money to extend grandma's life by a couple of weeks, for example.

That's not the only thing that should be cut. Remember the Dartmouth study by comparing the medicare cost of all areas in the country concluded that as much as 30% of expenses were sheer waste. The same study also has a list of recommendations.

So as always, I am for the common sense approach, which is to change what doesn't make sense, e.g., find a way to let nature take its course, and keep what makes sense.

That's just silly statement. I don't know abot California Medicaid, but with Medicare, it's dictated by law that they adjudicate the claims by a certain # of days after they receive it if it's a clean claim.

It seems you need to look closely to what that hospital is doing b/c that hospital ain't doing it right. We've never had a valid claim not paid by Medicare. We've had claims denied because their benefits ran out, MCARE is secondary payer and the primary paid more than what Mcare would have paid anyway so they won't pay the remaining amount. Heck, MCARE is the best payer--always pay on time.

And what kind of administrator would let 300 million dollars go uncollected from Medicare/Medicaid? Sounds like you need new administrators and some new business office folks.

I can be persuaded to run that place if the price is right.

350K/year +40% bonus if financial targets are met.
100K sign-on bonus.
1 mon vacation/year.

handyguy said: tripleB said:

Then I pulled up two large defense contractors that get 90% of their business from the US Government.

Are they getting paid?

Our local hospital is owed $200M from 2006 & $300M from 2007 from medi-cal & medicare payments. Seems like they aren't even getting paid. But they did turn a $20M profit mostly by charging regular customers more.

NoBoB said: I'm pretty sure the private insurers aren't allowed to rack up $40 trillion in unfunded liabilities either.That's because it is a meaningless term for a private company. Say Company ABC realizes a loss of $1 million this year. Then its "unfunded liability" in the next 100 years would be $100 million. But it is meaningless because next year ABC will just raise premium and/or cut costs to make itself profitable.

Medicare has a large unfunded liability. All that says is the benefits are too high compared to taxes in the next X number of years. Currently medicare still runs an operating surplus. But to close the future liability gap, it will need to either raise taxes or cut benefits. My vote is on cutting benefits. How about you?

The biggest issue I have with Insurance Companies is that they drive up the cost of healthcare. They deny valid claims and force the providers to hire staff to deal with it. The insurance company knows that most providers will not be able to respond to denials by the response deadline and that claim will never have to be paid. It is in the insurance company's best interest to deny more claim (for no reason) in the hopes that x% will not be handled by the provider in time. The more denied, the more money the insurance company gets to keep.

Providers have to hire teams of staff to deal with denials.
Providers have to jack up prices to cover losses due to denied claims.

Providers need to be "providing"care. Not playing a game with insurance companies hoping to get paid for valid (covered) services.

The insurance "game" needs to be fixed.

enc0re 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?

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.)

Not really, combination ratio is more specific to the insurance business and is more widely followed to determine profit from premiums only. You still have to deduct expenses not related to any money made from premiums.

Some insurance companies also make money off admininstering plans/RX plans/etc. In other words, it's not just writing and making money off premiums.

Needless to say, as someone pointed out, insurance is not a very profitable business. You win by being very efficient or you win by scale. With the amount of regulation and competition, the only way the sector could really be making a killing is if the major players were guilty of collusion - some people believe that theory.

And is response to the inefficiency being the culprit to low margins - I ask you how many large (since that is what we are talking about) companies don't have inefficient practices? Dig down in the trenches and you shall see

Who cares about profit margins? The issue here is that healthcare insurance is no longer insurance. It is prepaid healthcare that is subsidized by those who don't consume it at the rate of others.

Why does health insurance cover doctor visits, prescriptions, and other relatively routine services? Does your car insurance pay for oil changes and new tires?

Healthcare costs continue to rise because no one cares what it costs, they just pay their $20 copay and move on. If more was being paid out of your own pocket than consumers would actually shop for coverage and pay attention to prices, as well as pay attention to if they even need the treatment. Why should I subsidize someone elses Viagara prescription? Its a quality of life issue. If they must have it, then sell a a flat screen TV so you can buy it. Why do you think the cost of cosmetic surgery is decreasing? It's because insurance doesn't cover it and people shop around for it, thus determingin the market value for it.

US citizens believe that health "insurance" is something that should be paid for by anyone but themselves. Until the fundamental nature of what insurance truly is is restored, there is no solution to the healthcare problem.

chibimike said:
Overhead, including executive compensation, LOBBYING and marketing, is outrageous at health insurance companies.

Why are people only upset at Lobbyists at the private level? Why don't we have an uproar over the politicians pandering to Lobbyists and using tax payer dollars to do so?

When the US was founded, being a politician was a part time job. They all owned their own farms and did legislative things during winter. If we reform the government themselves to make it smaller then we wouldn't have to worry about Lobbyists because they would have no one available to lobby to!

chibimike said: I think lobbying is a joke. It is plain and simply bribery and would be outlawed, if it weren't bribery of the people who would have to pass the law to make it illegal.

That said, I think it is particularly obscene when a company takes money that should be spent on care for it's policy holders, and instead bribes members of congress with it. Think of the number of lives that would be saved or families saved from bankruptcy if that money were spent, as it should be, to pay for care.I gave you green for the idealism. But in reality it's all part of doing business.

barefool said: But replacing private monopolies with a government monopoly doesn't make sense at any level. Most of the negative results of monopoly power remain

This shows you have absolutely no idea what you are talking about. The downside to monopolies is that they can extract high prices when consumers do not have a substitute. A toll bridge is a perfect example. A toll bridge owned by a private monopoly will charge excess tolls and thus discourage the efficient movement across the river or whatever. When the government builds a bridge (as they often do) they will typically not charge anything, thus encouraging the fee movement of of good across the river. The government has a monopoly, but seeks to maximize the benefit of the entire society (or jurisdiction or whatever) while the private toll bridge owner simply seeks to maximize monopoly profits from the single bridge. Therefore governments are precisely the ones to control monopolies b/c they do not exploit the rent opportunities at the expense of overall efficency. People who take Econ 101 instead of reading Ayn Rand know this.