Profitability And The Health Insurance Industry

Wellpoint (Anthem Blue Cross Blue Shield’s parent company) has put together a very informative report on the cost drivers for health insurance premiums.  The dollar bill visual representation that they included is particularly eye-opening, in terms of detailing where our health insurance premiums go.  A lot of the report centered around what we already know: health care costs are what drive health insurance premiums.  But I was especially interested to read that a full 60% of consumers surveyed thought that profit margins for health insurance companies are more than 20%, and 25% of consumers pegged insurers’ profits at more than 40%!

This is astounding to me.  If we look at all industries, only two show profits greater than 20% for 2007 (network/communication equipment, and mining/crude oil production).  Further down the list we see “Insurance: Life, Health (stock)”, with profits at 10.6% of revenues.  Stick with me here, and click on the life/health insurance industry link, where you’ll see a list of 15 individual companies.  Nearly all of them focus on life insurance, disability insurance, long term care, annuities and other retirement planning services.  AFLAC stands out as a recognizable player in the health insurance industry, but their product is supplemental, and not designed to be stand-alone health insurance coverage (and they also focus on disability and life insurance products).  From what I could determine, three other companies on the list provide some type of health insurance coverage (but seem to be mainly focused on other insurance products): Conseco, Torchmark, and American National.  Conseco and Torchmark both sell supplemental and “a la carte” policies.  American National is still a mystery after my few minutes of researching.  Their website says that they sell major medical plans as well as accident and sickness plans.  But they don’t provide any plan details that I could find, and instead direct consumers to an 800 number to talk to a sales rep.  I don’t know for sure, but I’m going to hazard a guess that health insurance isn’t their mainstay if that’s how they’re marketing it.

The industry as a whole chalked up a profit margin of more than 10% in 2007, but that was carried by the life insurance side of the industry.  Health insurance companies don’t fare nearly as well when it comes to making profits.  Far more of their revenues are eaten up by claims, which continue to grow year after year as health care costs increase.

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

Comments

  1. Total profits from large companies are a combination of many things. Not the least of which are investments in securities and outright investments in other companys.

    It would behoove the reader to parse the individual company’s financial staements to determine what profits, if any, are due solely to:

    PREMIUMS – (PAYOUTS – OVERHEAD COSTS)

    …and NOT to their stock market investments.

  2. Edward Sullivan says

    Not to mention that profits are after dividends and payroll. How much of the profit margins are being hidden in outrages bonuses and pay for the big boys and large dividends to stockholders. I dont know if its true any more but a number of sports teams have been owned by insurance companies and with thier payroll and what they actually take in, how much money would have been spent on keeping a team out of the hole.

  3. David Holmes says

    Reply to Edward Sullivan: You are correct that “payroll” is a company expense; however, Net Profits come BEFORE dividends are paid out. Dividends are paid from profits, if any.

    The pure health insurance companies: Aetna, United Healthcare, Humana, and Cigna had 2008 Net Profits of 4.4%, 3.6%, 2.6% and 2.3% respectively. (Source: Annual Reports)

  4. HOW DO YOU JUSTIFY AT AETNA:
    5 INDIVIDUALS MAKING A TOTAL OF 74 MILLION IN ONE YEAR
    WHILE THE AVG AMERICAN MAKES PENNIES IN COMPARISON AND 10% OR MORE OF THERE INCOME GOES TO HEALTH INSURANCE!!!!!!

  5. HOW DO YOU JUSTIFY AT United Healthcare:
    5 INDIVIDUALS (DOES NOT INCLUDE ALL MILLONAIRES ON THEIR PAYROLL) MAKING A TOTAL OF 59 MILLION IN ONE YEAR
    WHILE THE AVG AMERICAN MAKES PENNIES IN COMPARISON AND 10% OR MORE OF THERE INCOME GOES TO HEALTH INSURANCE!!!!!!

  6. HOW DO YOU JUSTIFY AT HUMANA:
    4 INDIVIDUALS (DOES NOT INCLUDE ALL MILLONAIRES ON THEIR PAYROLL) MAKING A TOTAL OF 21.2 MILLION IN ONE YEAR
    WHILE THE AVG AMERICAN MAKES PENNIES IN COMPARISON AND 10% OR MORE OF THERE INCOME GOES TO HEALTH INSURANCE!!!!!!

  7. HOW DO YOU JUSTIFY AT CIGNA:
    3 INDIVIDUALS (DOES NOT INCLUDE ALL MILLONAIRES ON THEIR PAYROLL) MAKING A TOTAL OF 14.7 MILLION IN ONE YEAR
    WHILE THE AVG AMERICAN MAKES PENNIES IN COMPARISON AND 10% OR MORE OF THERE INCOME GOES TO HEALTH INSURANCE!!!!!!

  8. Brian churchill says

    OK, Steve, how do you justify $10 million + for Matt Lauer, Katie Couric, and numerous athletes adn entertainers?

    Closer to the subject, how do you justify 8 figure bonuses to Fannie Mae and Freddie Mac execs? Turns out they used Enron-type accounting to get them, too. Yet none was charged, some was given up by one exec, and the firms have been bailed out by taxpayers to the tune of several hundred Billion dollars. So tell me again why assisting American families to buy a home deserves that level of compensation.

    Frankly, compensation is completely out-of-control and irrational, but what’s bad for health insurers execs is OK for athletes and entertainers and politically-connected former gov’t officials.

  9. Cheryl K says

    Hmmmm…we need to eat, right? Grocery stores average a 1% margin. We need health care, right? Looks like health insurers make 3-5 times as much as those putting food on our table.

    1% of $1 trillion is still $1 billion, but I guess health insurance companies need $3 billion.

  10. Cheryl K says

    Ooops. I was off by a factor of 10. That should be a $30 billion profit margin for healthcare

  11. Reply to Cheryl K. Excellent point about health care making higher profits than food. We also need housing. Therefore nobody who sells a house can make more than 1% profit. If anyone sells a $200,000 house for more than $202,000, we should tax away ALL of the profit. We also need water, heat (at least in cold areas), and (arguably) indoor plumbing. So plumbers, toilet manufacturers, utilities, furnace makers, etc. should all be limited to a 1% margin.

    In short, the argument is horrible. Grocery stores don’t make a profit because the open market keeps costs down. Most people have several grocery stores to choose from. Hence, small towns and rest stops will almost always have higher costs. If we were to actually inject a little open market into the health care industry, the market would ensure that profits did not get too high because people would go somewhere else.

  12. OK – Let’s go (for a moment) with the idea that the health insurance industry is not the villian… We are still talking about A LOT of money going somewhere… If it is not the insurers, the doctors, the hospitals, (who am I missing) – then what is the problem. I hear health care cost are rising too fast – WHY??? Doctors are being throttled by insurance companies not to over test or over treat…
    The only place I know of that is driving costs – is the uninsured ended up at the emergency room – in acute states of treatable diseases – because they have no health care to manage things before they are acute.
    Again – am I missing a cost driver?
    Does this suggest a problem/solution?
    Just asking.

  13. The argument about costly care because health maintenance is postponed too long is easily checked. The single individual is an example, what we need to know is what happens across the entire population of uninsured people.

    There is a cost for providing care in the emergency room and there will be a cost for insurance that will provide health maintenance and avoid a trip to the emergency room.

    If indeed insuring the entire population cost less than having a few of them go to the emergency room then we could ensure them and receive a tax refund. Rather, taxes go up to pay for the insurance. Ergo, the cost for insuring the entire population is greater than the cost of treating the few who show up at the emergency room.

    However, your question of what is driving the cost is interesting. In my view it is the absence of market forces. The medical transaction is between a doctor and patient. With the employer pay system the financial transactions are between employer and the insurance company, and also the insurance company and the medical provider. There is no incentive for the consumer to use resources wisely.

    An analogy is automobile insurance. What would that look like if it covered fill ups and oil changes? Further, what if auto insurance was provided by your employer. What incentive would you have to use less gas? None. The financial incentive is removed from the consumer by a 3rd party payer.

    Replacing the employer with the government doesn’t fix the 3rd party payer problem. That’s why costs are going up in Medicare. This suggests the best fix is to move towards a consumer pay insurance system.

  14. I appreciate your point of view, but the statement that “taxes go up to pay for insurance” was just that a simple statement. No proof, no allowance for how much could be saved by making sure that people stayed out of the ER and instead got routine health care.
    If you had said, the total cost for ER visits in this country on a yearly basis was X, and the cost of insuring all is Y, and the difference X-Y is still greater – then you would have a case.

    I do understand your point that if my personal pocketbook is not impacted each time I make a health care decision, I am not as likely to “conserve”, however I do in fact conserve. While my health care is paid by my employer – my contribution (payroll) and deductible keeps going up every year.
    My employer does a fine job of keeping us all aware that these costs impact our profitability, and therefore our compensation. I understand the problem and I do personally participate in the cost, via my contributions to my health care.

    But we are not speaking of my situation, we are speaking of those who do not get insurance from their employers and have to decide between groceries and health care. Market forces have spoken there. The consumer in this case has decided that they have to risk not having insurance in order to survive.

    An example is a woman I know who cannot afford health care insurance. She now has a condition that requires surgery. In order to get this surgery she is now trying to get insurance. The plan is not to disclose the condition and wait for a while to have “an accident” that finds the problem.
    If that fails, then she will have the surgery and plans to file for bankruptcy.

    In this case the medical transaction is between the doctor and the patient – and the patient has determined she cannot get needed medical care without deception or without going bankrupt.

    So my point stands – care at the ER cannot possibly be as cost effective as care at the GP, and deception/bankruptcy is no way to pay for health care. We must have some basic health care available for all our citizens, and the private sector and the individual clearly have not been able to accomplish it. While government is the last resort – I see no other option at this time.

  15. A few points:

    1) the system needs fixing. Its not a crisis, its a chronic problem that deserves deliberation to come up with an optimal plan.

    2) America’s wealth is NOT unlimited (look at our debt). The public option will lead to rationing when demand exceeds resources.

    3) failure to implement tort reform is a glaring example that government is not actung purely in the public’s interest. Lack of tort reform leads to 1) unnecessary CYA lab tests, and 2) malpractice insurance policies; both huge contributors to costs.

    4) the government own policies are a significant contributor to costs. (e.g., non portable policies across state lines)

    5) Consumers spending their own money are the best cost containment method. (Compare the cost of elective Lasik: (declining year to year) vs. covered procedure (escalating year to year)

    6) When the survival rates of patients with equivalent cancers is compared between government run health care (UK, Germany, Canada) and private healthcare (US), Patients with private coverage live longer.

    My conclusion; have consumers pay for day-to-day health care. Cover catostrophic incidents with a needs-tested co-pay.
    Healthcare resources should be spent on provably legal citizens, everyone else pays cash.

  16. Scot Walker says

    We have Medicaid for the poor in this country. It averages about 22% of each state’s budget already.

    We have Medicare for the elderly in this country. It has $30 trillion of unfunded liability.

    So in short, we already have the government in healthcare and they are BROKE with what they have on their plate now and you want to add the rest of the country to that plate?

    We can’t afford it. Even if they ran healthcare much better than the DMV, FEMA, Post Office, Passport Office, we can’t afford it.

    I agree the solution is to have tort reform and open up the health insurance market to the whole country versus being segmented as it is now.

    Imagine if Apple had to have a different iPhone for each state because of each state having their own requirements. How much would it cost then?

    This isn’t rocket science.

    Government employees, including Congress, have an array of plans to choose from – all private.

  17. Keith S., CFP says

    In reading through the points above, Scott’s seem to be the best backed up with facts.

    Regarding health care at the ER. Alternatives are available. 1. Urgent Care clinics have opened across the Denver area.
    I used one for the 1st time last winter when I had strep. This clinic is open 24/7-365. A number of years ago, I would have gone to an ER for off-hour or holiday sprained ankles, strep, flew, etc. Conditions not rising to a true emergency. This was a good consumer experience for me. I was in and out in less than 1 hour. I carry a higher deductible on my coverage, so I paid cash.

    My experience was much better than a friends experience in Canada. He saw a 12 hr wait for a sprained ankle. Waits there for basic care, diagnostics, surgery are very long.

    We will always have people who truly cannot afford coverage. (As opposed to some who are uninsured who chose not to carry coverage.) It is a very appropriate public policy to offer coverage to those who truly cannot afford coverage.

    2. I just saw a walk-in at King Soopers called the “Little Clinic”. I understand these are staffed by RNs perhaps PAs. Good alternative for walk up care.

    Both are examples of entrepreneurs addressing a market need.

    Health Insurers Profits: I have no doubt that the profit for health companies are less than 5%. Much lower than people generally imagine. When the comment is made that $1 billion of profit is still $1 billion. If that translates to 2% to 5% profit.. That is not much. Don’t care about the profit? Well, does your IRA, 401(k), mutual fund or pension fund hold shares in health stocks? It seems that profit is bad except when it apples to your business, salary raises, retirement plans.

    If health insurance was very profitable, there would be more companies entering the market. More insures have left the health insurance market.

    Some feel that a government plan will be more efficient since the profit motive will be removed. Which government programs are deemed to be models of efficiency? Which country is the poster child for a universal system?

    Will members of congress and the administration who favor a government option be the first to register their families and themselves? I doubt it.

    My suggestions not necessarily in order:
    1. Tort reform.
    2. Divorce health insurance from employment. Everyone picks their own private company.
    3. Government should not be in the insurance business. Government should enable people to make their own decisions not make people dependents. Act like a good NFL official and perhaps a cheer leader. Official: Enforce rules, impartial judge, Cheer leader, encouraging people. I don’t want to see government as a competitor.
    4. Health policies are not underwritten for pre-existing. We have a general “risk pool” for the US. Actuaries would be able to calculate the general risk factor. That factor is built in the premium cost.
    5. Those that cannot pay for their own health coverage must have public support. This is call public charity. But make no mistake, if I cannot support the cost of my insurance, I am asking someone else to help pay for me. This needs to be either public or private charity.
    6. We, all of us, need to be smart consumers. Ask about pricing at a Drs. Office. Price shop care when possible. Health Savings Accounts (HSAs) can help with this.

    There is no easy answer. However, the more control government has over our lives, the fewer choices we have.

    To the extent any health care changes promotes consumer choice it will succeed. To the extent it, over time, removers choice it will fail.

  18. I am not sure if you can go to an Urgent Care – if you are not insured – and cannot afford it… The law provides for ERs and hospitals providing emergent care – perhaps that should be changed.

    As for those who cannot afford health insurance, perhaps the government should provide more free clinics. I hate to be accused of class distinction, but the reality is that those who have the money drive better cars. Perhaps health care should not be “better” for those with money, but perhaps more convenient.

    On the up side of that, it gets the high wage earners back to their jobs sooner. On the down side, that means those who can least afford to miss work – miss more work to wait at free clinics… That does not sound to good either.

    I believe that the right to life and health should be protected by the Constitution and the government, I am not not sure if equal access is a requirement.

    Please don’t beat me, but part of capitalism is having more, and getting better service – what do you think?

  19. Grady R Patterson says

    There is a minor error in the post – the correct Industry category is “Health Care: Insurance and Managed Care” – and the aggregate profit margin in 2007 was 6.2%

    For more up-to-date information, YahooFinance will give data for the latest quarter, based on quarterly earnings statements: this is available at http://biz.yahoo.com/p/sum_qpmd.html

    It is interesting to note that the highest profit margin for this quarter was beer brewers – at well over 6 times the profit margin … wonder what that’s doing to our health???

  20. Grady,
    Thanks for the heads up – good attention to detail. Now I’ll know where to look next time. I wonder if the profits in the beer industry have anything to do with the recession? Maybe when things aren’t looking so good financially, people are more inclined to drink?

  21. I read some calls for tort reform but I also read this from the Wellpoint report:

    “Medical malpractice: Medical malpractice is not a major driver of spending trends. Premiums for liability coverage and defensive medicine contribute to health spending at any moment in time but are not considered a recent significant factor in the overall growth of health care spending.15 Put another way, tort reform would lower health insurance premiums but medical malpractice is not currently driving the rate of increase. or medical liability,” (page 9).

    I think tort reform should be balanced with adequate consumer protection.

    I examined a chart rather recently comparing the health care systems of a number of countries, and the item that I found most notable was that the American health care system has by far the most specialists per capita (I would like to find that chart again).

    By the way, the Wellpoint report is quite informative, for those of you who may not have had the chance to read it.

  22. Half of my class at the University level thinks that the Fortune 500 companies have profits over 50%, when it’s less than 5%

  23. William Chornooky says

    If we have a single payer insurance plan run by the government how are the premiums to be determined? When the plan is put into effect and phe payments are made for the treatments performed and the government finds out that the premiums dont cover all expenses (And I mean all expenses including the building costs, electrical, heating and janitorial, computer, stationary, printing, automotive, among many other costs and the salaries and benefit expense of the staffs administering the program) what will the government do? Will they raise the policy premiums, or take it from the taxpayers in increased taxes. No matter what some politicians and many stupid people believe the government can make money by printing it without reducing the purchasing power of the dollar. It is nice to tell people that you will be given something without any sacrifice on your part, even health maintenance organizations (HIP GHI and others) generally have you make a copayment when seeing a practioner.

  24. William:
    I guess you could say the government has an interesting dilemma – charge the taxpayers directly with higher premiums or indirectly with higher taxes, someday.
    I think most people would take the latter option.
    Up until I researched government financing of Medicare and Social Security, I thought only God could create something out of nothing.
    Now, I know that the government can print more money, issue debt, with one hand, and issue an asset with the other.
    Thus, when government borrows from itself (the trust funds), it actually creates an asset and liability at the same time!
    Voila.
    Don Levit

  25. Something to take note; an accountant can make a company look profitable on the books when they are losing their shirts, so how hard would it be for a company (or even an industry) to cover up their gross profits by burying it in the details? The better job they do at burying the profit, the more they get to hold on to.

    It’s like the story about the salesman who went on a sales call to Texas. To fit in, he decided to buy a cowboy hat. Bought a real nice one for $50 and listed on his expense report. The payroll accountant called up the salesman and told him that the company wasn’t going to pay for the hat. So for the next four months, he kept listing the hat on his expense report. The payroll accountant was just about ready to read him the riot act and called him one last time to inform him that the company still wasn’t going to pay for the hat. So on the next month’s expense report, the salesman put a note at the bottom that said “I challenge you to find where I put the $50 for the hat.”

  26. Afell:
    Who says accountants are not creative individuals?
    I have done extensive research on the government’s accounting for Social Security and Medicare.
    Unlike typical loans, when the government borrows from the trust funds, interest and principal are not paid back until the particular trust fund’s expenses exceed its income.
    For example, in 2008, The HI trust fund of Medicare had this situation.
    So, only the excess was reported as a current budgetary expense.

    The reason given for the delay of principal and interest, is that the loans from the Treasury create an asset for the trust funds, thus, from an accounting perspective, it is a wash.
    This is the creating something out of nothing I referred to.

    A few excerpts will be helpful:
    In these excerpts, intragovernmental loans are loans from the trust funds to the Treasury.
    From the GAO report entitled “United States Federal Debt,” on page 15 it states “Treasury incurs interest cost on debt held by the public, but government spending does not reflect cash used to retire the principal of outstanding debt. When it matures, the principal that comes due is paid off in cash raised by issuing new securities, and the debt is rolled over. If the budget is in deficit, the government must both issue new debt to the public and roll over maturing debt.”

    Regarding intragovernmental loans on page 24 it states “Trust funds are credited with interest on their debt, since they are lending their surpluses to the Treasury. This interest of $158 billion in 2003 is an accounting transaction that does not require cash payments from the current budget or represent a burden on the current economy.
    The interest received on debt held by government accounts is a future priority claim on the Treasury.”
    http://www.gao.gov/new.items/d04485sp.pdf.

    Regarding intragovernmental principal payback, in a paper entitled “Social Security and Medicare Trust Funds and the Federal Budget,” it states on page 3, “The general fund has the obligation of repaying the principal of the (intragovernmental) loans with interest when trust fund income falls below expenses.”
    http://www.treas.gov/offices/economic-policy/reports/budget_trust_fund_perspectives_2008.pdf.
    Don Levit

  27. My first quote explains that only interest is paid on public debt (there are 2 types of debt, public debt and intragovernmental debt).
    So, while interest is currently paid on public debt, the principal is not paid back unless there is a surplus (which has happened like 2 times in the last 40 years).
    What a great governmental break on debt, right?

    Don Levit

  28. As several have noted, profit is malleable. And unlike the “try to find where I hid it” example with the cowboy hat, it’s all (or mostly) in the open. Those obscene executive salaries? Not profit. Lavish offices, huge marketing budgets, buying politicians, travel to deductible junkets (Google AIG Pointe Hilton Squaw Peak Resort), bloated claims denial departments, etc. None are “profit” and none are taxable.

    Since I don’t have employer-provided insurance, I actually subsidize all of these with my tax dollars. And none are included in the 3-4% “profit” reported by the industry. (BTW, the employer-insured get around $2,000 each of tax breaks compared to me and other entrepreneurs). So the more relevant number is “overhead plus profit.” According to the insurance industry itself, theirs is 16.7%, while Medicare’s is 3.3% Private insurance goes up by 7% a year, doubling every 10 years (doubled in the last 9). You think in 10 years your employer will pay twice what they do now for this “benefit?” And that it won’t come right out of salary increases? Furthermore, Medicare pays 19% less for doctors and 25% less for hospitals, v.s. private insurers. Add the two, and a “Medicare for all model” has a current and documented savings of over 30%. Where else can you find a 1/3 savings on health care?

    “Tort reform” is such a GOP talking point. It’s 0.5% of health care dollars. Set that up against the 16.7% overhead and profit and see what impact such reform would have, even if 100% of malpractice cases were fraud (obviously, they’re not). 4 states have implemented stringent award caps. In every case, malpractice insurance went UP, not down. There are no savings there, though the insurers would be glad to have another limit on their risk.

  29. No one takes the care to distinguish profit per dollar of revenues and profit per dollar invested. I’m certain that no one here is taking care to measure apples-to-apples. Grocery stores have low margins because it is a high volume business, but no one would invest in a grocery store if their ROI was ONLY 1% of a dollar INVESTED.

    Also, Medicare’s operating margins are a crock. The cost of administering an an insurance program does not vary linearly with the cost of care. Insurance companies insure lots of people who consume no care, but still inflict an administrative cost, thus making them look ‘inefficient’ when they are not.

    Thus an insurance program populated entirely with older, sicker patients (like Medicare or Medicaid) who consume copious amounts of care will look comparitively cheaper or ‘efficient’ in percentage terms. Medicare’s cost per beneficiary was $509 in 2005, compared to $453 for private insurers. Also consider that insurers are subject to a number of regulatory costs and taxes that Medicare is not.

    As for lower reimbursement rates, that’s why may doctors stop taking Medicare or just retire early, why go to the trouble.

  30. So Tyler suggests that private insurers are much more efficient than Medicare and then cites a beneficiary cost of 453 (private) to 509 (medicare) a difference of about 11% or so. Yet he also says that Medicare is entirely made up of older sicker patients and private insurers have lots of people who never use it, And the best private insurers can do is 11% better?

    As for regulatory costs and taxes…duh! They’re FOR-PROFIT! Medicare is not. Of course they are taxed and you sure can’t expect them to regulate themselves for God’s sake.

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