Health insurers’ profits 35th of 53

By Calvin Woodward

The Washington Post

October 26, 2009

Health insurance profit margins typically run about 6 percent, give or take a point or two.

Health insurers posted a 2.2 percent profit margin last year, placing them 35th of 53 industries on the Fortune 500 list. As is typical, other health sectors did much better – drugs and medical products and services were both in the top 10.

Leading the list: network and other communications equipment, at 20.4 percent.

http://www.washingtonpost.com/wp-dyn/content/article/2009/10/26/AR2009102600229.html

And…

Morningstar

October 26, 2009

Health care plans – net profit margin: 3.3%

http://biz.yahoo.com/ic/522.html

And…

American Medical News

August 24, 2009

Medical loss ratios of largest publicly traded health plans:

Average 85.2% (non-weighted, range 82.9% – 86.8%)

http://www.ama-assn.org/amednews/2009/08/24/bisb0824.htm

Comment:

By Don McCanne, MD

In simple accounting terms, profit represents the difference between gross revenues and the cost of producing and marketing the products or services sold. So what is the product that the private insurers are selling us? Administrative services.

Unlike most other businesses, the revenues of the private insurers include our own funds that essentially are held in trust for the eventual payment of medical claims – currently 85.2% as represented by their medical loss ratios. Their business costs relate strictly to their product – the administrative services – currently 14.8% of their revenues. Thus their profit margin, to make sense, should be calculated based on their business model of providing us administrative services, but not on the funds held in trust which involve negligible expenses but which provide them with long term investment income. (Profit statements for the notorious financial services industry should also be adjusted accordingly since that is also our money that they are jerking around.)

The 3.3% profit margin reported by Morningstar includes the funds held in trust, but if adjusted to include only all costs of their legitimate business operations of producing and marketing their administrative services then their profit margin is actually 22.3%. That moves them into first place on the Fortune 500 list of profitable firms, in front of the network and communications equipment industry (20.4% profit).

To be realistic, playing with these numbers does not change the fact that eliminating these profits would have only a very small direct impact on our total national health expenditures – saving less than 1% of our health care dollars. What would have a tremendous impact would be to eliminate an industry that has the incentive of a 22% profit margin on a product that is designed to reduce our access to the health care that we need, not to mention a product that places a costly administrative burden on our health care delivery system. Eliminating the private insurance industry could have a hugh direct impact on our health care spending – diverting perhaps $4 trillion over the next ten years from administrative waste, and redirecting it to patient care.

We need to take heed of this comment in today’s Los Angeles Times:

“As President Obama’s push for a healthcare overhaul moves toward its final act, the oft-vilified health insurance industry is on the verge of seeing a plan enacted that largely protects its financial interests.”

http://www.latimes.com/business/la-fi-health-insure26-2009oct26,0,11741,full.story