Because most philosophies that frown on reproduction don't survive.

Monday, August 03, 2009

Excessive Health Care Profits

In the health care reform debate, we often hear about how huge amounts of money that could be going to provide people with treatement is being sucked up by insurance company profits instead. This kind of thing always makes me wonder, since in my experience a competitive market place will usually drive profit margins down pretty low. So I thought it would be illustrative to look up how much money the top private insurance companies make, and then determine their profit margins and profits per enrollee.

The following information is publically available on Google Finance. Revenue figures are annual ones for the year ending 12-31-2008. The total revenue, income before tax and income after tax figures come directly from each companies public financial reports. The enrollee figures are potentially slightly more approximate, since there I googled for the most recent press release which showed total enrollment for each company.


It struck me as interesting that it was Humana, with the lowest profits per enrollee in 2008, which just posted a healthy profit increase for Q2. Wellpoint and Aetna have suffered membership declines in the last quarter.

In no case is the company making more than $100 per enrollee per year in profits. Given that most insurance plans cost a good $4000-$6000 per year, the amount of what we pay for insurance that goes to "lining insurance companies' pockets" would seem to be fairly small.

8 comments:

Mark Adams said...

Great post and great information.

We really need to disabuse ourselves of the notion that making substantive cuts to the cost of health care is as easy as reducing administrative costs and "cutting out the middleman" -- i.e. insurance companies.

Kate said...

My suspicion is that health insurance is just not a very profitable proposition - whether public or private - and the real money suck is the amount of money that goes to ensuring the small profit margin these companies manage. Did you find any breakdown showing how much of each insurance dollar goes to underwriting? I read that figure recently but unfortunately cannot remember it, though I do remember that it amazed me that costs are so high as to make it more profitable for insurance companies to employ an army of people to sift through and deny/contest each claim than it is to just pay the costs of medical treatment.

Anonymous said...

Darwin, the problem with insurance companies isn't that they make too much money. It is that they routinely interfere in decisions that ought to be between the doctor and the patient.

But since you brought up cost, I would be remiss not to note this:

http://www.kff.org/insurance/snapshot/chcm010307oth.cfm

The US spends more on health care than any other country in the world, by a wide margin - an impressive feat considering that we don't even provide coverage to a large sector of our population. We are not healthier than our Euro or SE Asian brethren who spend far less than we do (and, in most cases, who smoke more than we do, exercise no more, and eat equally fatty diets). Where is all our healthcare money going?

Joel

Mark Adams said...

Joel: the problem with insurance companies isn't that they make too much money.

Perhaps but Darwin was responding to a popular argument that tries to explain the high cost of health care as a result of insurance companies' profit margins. To a lesser extent the blame is also placed on administrative costs.

This is simply not true. According to research from the Department of Health and Human Services, 12.2% of premiums collected in 2007 by private insurance companies went to what it called "net costs."

This includes the "costs of paying bills, advertising, sales commissions, and other administrative costs; net additions to reserves; rate credits and dividends; premium taxes; and profits or losses."

http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf

Kate said...

Wait a second - money paid out to cover costs makes up only a fraction of an 8th of the premiums paid to insurance companies? Did I read that right? And I don't doubt that advertising, sales and admin are a HUGE part of the rest of that 12 percent.
Just where is the other 88% of the premiums going??!!!

Mark Adams said...

No, you did not read that right. The net cost, which I take to be a term of art, refers to those expenditures listed above in my previous comment. They include admin costs (e.g., paperwork involved in paying bills, advertising, and employee wages); profits (what's left after all the bills are paid); taxes; and "net additions to reserves; rate credits and dividends" (I have no idea what these last three mean).

The 88% goes to pay out health benefits. Most of those benefits are paid to hospitals, doctors, clinics, and for drugs (87% of total benefits paid and 76% of premiums go to these categories).

For more details see page 14 of http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf

class-factotum said...

The US spends more on health care than any other country in the world, by a wide margin

More care. Better care. Research.

Mark Adams said...

Joel, It was my intent to provide a slightly more lengthy response but because I may not have time to do so I at least wanted to provide you with this link:

http://www.rwjf.org/files/research/101508.policysynthesis.costdrivers.rpt.pdf

It is a report on the causes of rising health care spending. The report synthesizes the best research on the topic and basically comes to the determination that the largest cause of the increase is technological improvements. About half to two thirds of the increase in health care spending comes from technology.

They give three reasons for the difference between spending in the US and other developed countries. The first is the price of health care. I realize this seems a more than a little question begging but the point is that specialists and drug manufacturers can charge more in the US than in other developed countries because in the other countries there is monopsony (the market condition that exists when there is only buyer). A single buyer means that the buyer determines the prices. The other two factors are certain inefficiencies in how we provide services and higher insurance administrative costs (an position I've already expressed skepticism about).

I think you will find the report very helpful. One friend of mine, whose day job is being a health policy wonk, said that reading it will make you "more knowledgeable about health care than 99.5% of the US population."