Just How Profitable Are Healthcare Insurers?

http://larrycheng.com/2010/03/08/just-how-profitable-are-healthcare-insurers/

by lwc123 • 16 years ago

23 50 16 years ago

jrockway• 16 years ago

All this means is that the insurance companies spend most of the money they take in. They could hire x more employees and then they wouldn't be profitable at all. That doesn't mean they are tirelessly working to save you money, it just means they aren't profitable. I wouldn't read too far into this data.

jbooth3• 16 years ago

Don't have a cite offhand but insurance industry employment has gone up by quite a lot (close to double if I recall correctly) since 2000.

Let's say I'm an insurance CEO. You tell me, that by spending 20 million on increased claim scrutiny, we'll net 1 million in total savings by disbursing 21 million fewer dollars.

What do I do there? It's obvious, I go for the 1 million. So I just spent 20 million in order to hand out 21 million fewer dollars. The policy holders are worse off, the country's worse off, and the insurance company only got a crappy 1 million out of it, compared to the 21 million they're no longer disbursing.

All perfectly rational given the incentives -- which is why the system's broken.

anamax7• 16 years ago

Insurance companies are, however, subject to "the law". Govt agencies mostly aren't.

Feel free to compare Medicare's dispute process with that of an insurance company. And remember that some people can switch insurance companies while no one can switch Medicare.

We can make switching insurance companies easier. Switching "single payers" is, by definition, impossible.

ireadzalot• 16 years ago

I highly recommend reading this short piece. Even though the profit margin is so small for Health Insurance Companies, “the better measurement is not profit, but return on invested capital (ROIC). ” One more line from the article: “If I had a business that consisted of people giving me $100 bills and me paying them back $96, it would be silly to describe that as a very low-profit industry.”

Source: The Economist

Link to Article: http://www.economist.com/blogs/democracyinamerica/2010/03/he...

tullius2• 16 years ago

Profit margin is the important metric to look at in the context of moving to a socialized system. The stats in the linked article say that even if a public entity could run as efficiently as a private insurer there is only 3.7% surplus value to capture.

rwl• 16 years ago

You are assuming that a public entity couldn't run more efficiently than a system of private ones, which is exactly the point -- or one of the points -- at issue.

rit• 16 years ago

Yes, and Google, Yahoo, Apple, etc don't get to decide if their customers get the heart transplant they so desperately need.

These companies need to be operating as not-for-profits, or coops. Their motivations between decisions should be driven by what's best for their members, NOT what's best for their pocketbooks. No matter whether it's a profit margin of 1% or 10% or 1000%.

jdminhbg• 16 years ago

That's not an argument, it's just an assertion of taste.

pw0ncakes5• 16 years ago

Most importantly, Google and Yahoo, for the most part, don't hurt anyone. They make their money in unambiguously ethical ways. US health insurers, by contrast, contribute to a 9/11 every month in preventable deaths. I don't object if Google makes a lot of money; they provide great services and they should. On the other hand, health insurers are essentially hit men-- they kill* for profit. Their pathetic numbers just indicate that they aren't very good at it.

* This may be a bit inflammatory, but it's only a mild exaggeration. In reality, their profit-making model is to externalize costs, and they don't really care whether the patient dies or (more often) the costs are dumped onto the government, or hospitals in the form of unpaid medical bills.

pw0ncakes5• 16 years ago

Most Americans (probably 80-90%) conflate corporate greed with profits, which is the wrong way to look at the problem. Most of the asshole greed we see today is not in profit per se, but in back-scratching compensation deals for top management. Note that CEO pay is not profit. It's an expense. Most Americans either don't make or are unaware of this distinction. Managerial overcompensation is strictly worse, because at least one can invest in a company that is "profiting too much".

I'd like to see the data for other years. Recessions are bad for health insurers, because when people get fired, young and healthy people tend to drop their insurance while those who are older stay on the plan (with COBRA). So adverse selection sets in and insurance companies lose.

CWuestefeld5• 16 years ago

Most of the asshole greed we see today is not in profit per se, but in back-scratching compensation deals for top management.

Citation, please? I'm very skeptical that pay for top execs amounts to a really significant part of corporate expenses, or that corporate profits could be increased substantially by cutting these expenses.

dfranke• 16 years ago

Ooh, interesting question. First number I was able to grab: Citigroup lost $7.8B in 2009. In 2007, their CEO's $24.8M in compensation from the previous year ($1.2M salary, $13.2M bonus, $10.4M stock grant) was denounced as scandalous.

Edit: slightly more apples-to-apples: their 2007 profit was $3.6B. Their 2006 profit was $21.5B.

pw0ncakes5• 16 years ago

Executive pay may be small compared to the corporate balance sheet, but the level it's at allows for and encourages bad behavior.

1. The extreme disparity between CEO pay and other vital executives encourages people to backstab in order to ascend the hierarchy. So "work" for those who are in line to be CEOs is more about jockeying for position and trading favors than about building a company.

2. In addition to (1), such disparities are bad for morale, especially when the CEO is a "hired gun" instead of someone who has been part of the company for a long time.

Except in athletics, where talent is objectively measurable, the "star system" tends to piss off everyone but the stars, and let's be realistic: non-stars are 99% of people, and probably 3/4 of those who would be considered objectively the most competent.

3. When the CEO makes $500,000/year, he's drawing a good salary but still has the incentive to build a legitimately strong company for the long-term. When he has a "performance bonus" that will give him fuck-you money in 12 months if he plays his cards right, his incentives are in the short term.

4. When there are massive discrepancies in pay between the bosses and the people they are managing, the social class and lifestyle disconnects become problematic and can damage morale. This is why the best CEOs try to appear middle-class in terms of dress and work habits.

CEO pay is at such a level that it actually brings lower quality of management. This is what's truly alarming. Decades ago, when CEO pay was much lower, American companies were well-managed and produced great products like (imagine this for a second) cars that people actually wanted to buy. Now, big-company CEOs command stratospheric salaries and generally such ass. This is because executive pay is so high that it has pushed these people completely out of touch with reality.

dagheti• 16 years ago

A great point, and it's important to remember that this effect also maps to public choice theory in government or excessive compensation of management in the non-profit sector (though statistically I believe it is lower than in private entities), where the incentives in some ways can make it even harder to prevent abuse.

evgen• 16 years ago

Recessions are bad for health insurers, because when people get fired, young and healthy people tend to drop their insurance while those who are older stay on the plan (with COBRA).

It is also the case that insurance companies invest a large portion of their premiums in short and medium term investments; few are allowed to get so fragile that they are in danger of having cash flow problems due to some small fraction of the policyholders shifting the cost basis. When the market tanks they have less income from investments and must cut costs (e.g. deny coverage) and increase income (e.g. raise premiums.)

Try graphing DJIA, unemployment rates, and insurance premiums and see when changes in the first two lines best match increases in average premiums...

marshally• 16 years ago

Another important factor here is the amount of reserves that are held back from each $1 of premiums input into the system.

For a single payer system, the idea of reserves is non-sensical (similar to the farce of the 'social security trust fund' which makes zero sense from a macro economic perspective). I would make the point that reserves are a waste product of an insurance based system.

anamax7• 16 years ago

> Another important factor here is the amount of reserves that are held back from each $1 of premiums input into the system.

You're forgetting that insurance companies invest that money.

There are times when claims payout exceeds the premiums, yet insurance companies still manage to make money because of the investments.

As always, if you think that you can do insurance better, go for it. If you're right, you get rich and drive them out of biz.

GFischer• 16 years ago

I work for an insurance company.

The company makes an operational loss, but it makes a killing in the financial market, and is thus (very) profitable.

Claims don't exceed the premiums, but it's narrow.

owinebarger6• 16 years ago

You would be wrong - reserves are there to pay for liabilities already incurred. Social Security is basically a Ponzi scheme without the deception. You're right about the "Social Security Trust Fund" - can you imagine a state allowing a private insurer to buy its own bonds as assets?

protomyth4• 16 years ago

If a business makes a profit by serving its customers, I'm ok with that. At this point, given how messed up the health care system is (law, super expensive EOL care, high entry cost for doctors and nurses, poor non-emergency care situation), can you really do the right things. Given the failure of Indian Health Service in serving its customers (to the point of pinning a note that says "we won't pay" on a person transferring to a hospital), I know the government can't even on a loss / non-profit basis.

I almost think the government should start with tuition incentives / loan relief for doctors and nurses, and create a government cataclysmic insurance fund that covers stuff over a $100K (think flood insurance).

anamax7• 16 years ago

> this point, given how messed up the health care system is (law, super expensive EOL care, high entry cost for doctors and nurses, poor non-emergency care situation), can you really do the right things.

Which of those factors are due to insurance companies?

If you don't fix them, how likely is it that any "new" system will be any better?

protomyth4• 16 years ago

Those factors are the landscape the insurance companies operate in. The biggest problem is that I don't see any of the actual legislation doing anything about actual input costs to the system or increasing competition.

guelo• 16 years ago

If they could figure out how to get rid of their sick customers they could increase their margins. I wonder if they've thought of that.

ibsulon• 16 years ago

1. I don't think anyone would complain about health care if it was handled well by insurance companies. However, health care, by and large, is suboptimal in this country. http://ucatlas.ucsc.edu/spend.php shows the price to outcome outlier that we are.

2. We need to look at profits in the health care industry as similar to a VAT. If you have a profit margin at the end of the line, even if it's 18%, it's not that big of a deal. However, if each segment along the line adds a VAT, even a 5% tax of every segment can add up to a third of the cost, depending on how deep the pipeline goes. Each segment of the line is taking a profit. 3% of the health care industry, x% of the hospital (less than you would think because they subsidize so much of the uninsured) y% from the pharmaceutical industry, z% from the individually owned clinic... The end result is a disproportionately expensive system in this country.

roboneal5• 16 years ago

Can we get past the fact that "healthcare insurance" isn't really insurance?

True insurance essentially "insures" against catastrophic loss and policies are underwritten on a personalized basis.

"Health insurance" often covers routine care, medications, diagnostic tests, etc -- hides the actual costs behind devices like "co-pays" and distributes cost inflation across the "group" instead the high risk/sick individual.

How expensive would your car insurance be if it covered oil changes, car washes, body repair and then lumped you, the driver with a clean record, with your neighbor with his 5th DUI?

owinebarger6• 16 years ago

And what makes you think you aren't lumped in with your neighbor?

Every rational form of insurance relies on distributing risk over groups of independent risks to obtain the benefits of the central limit theorem. There are some very specialized policies, and the Lloyd's syndicate, but anyone wishing to avoid ruin will diversify their risk.

roboneal5• 16 years ago

You missed the critical point...health "insurance" in the traditional workplace is not UNDERWRITTEN on individual basis like life or car insurance.

22-year old single, marathon runners pay the same rate as a 37-year old, single, lazy, 300lb HackerNews commenters.

That and the fact that routine care/services are "paid" for by so called "health insurance" is why it's bogus to compare it to standard insurance.

owinebarger6• 16 years ago

The problem for healthcare insurers is that healthcare is a product often obtained while under duress. Patients have to trust their doctors, so they'd much rather call their insurers greedy than the people to whom they entrust their most valuable asset.

If you want to look for greed in healthcare, look at medical schools, hospitals, doctors, and pharmaceutical and medical device manufacturers. Insurance costs are a simple reflection of the incomes of those parties. State regulators (for small group and individuals) and shopping around by sophisticated consumers (large groups) assures that.

DennisP• 16 years ago

Their profit is irrelevant to me. The important number is their medical loss ration: how much of my premiums go into actually paying for healthcare. In the U.S., shareholders get antsy if insurers pay more than 80% of their premiums on healthcare, and some insurers pay less than that. In France, Germany, and Japan, private non-profit insurers spend over 95% of premiums on healthcare. (Source: The Healing of America by T.R. Reid)

One expense for U.S. insurers is medical underwriting - the army of people they employ to find reasons to deny you coverage. The reason they have to do this is that their competitors are doing it. Anyone who provides better coverage at a good price will be swarmed by sick people and go out of business, so they are in an arms race to provide the worst coverage they can get away with.

Level the playing field by, eg., requiring coverage of pre-existing conditions (as the countries I mentioned do) and this arms race goes away.

Just How Profitable Are Healthcare Insurers?

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