Insurance Companies: Profits? What Profits?

This is from AHIP’s blog:

  • According to Yahoo! Finance’s latest analysis of quarterly financial data, the net profit margin for the entire health care sector is 15.48%.  Using the same index, health plans have a 4.7% net profit margin.
  • This ranks the health insurance plan industry 12th out of the 16 industries that make up Yahoo! Finance’s health care sector.
  • Analyzing 13 health insurance plan companies on the Fortune 500 list, the profit margin for these 13 companies averaged 3.19 percent for 2009 — for 2008 it was 2.3 percent for these same 13 companies.
  • Six of the 13 companies actually saw a decline in their profit margin – averaging a decline of 48.7% in profit margin from 2008 to 2009.

Comments (8)

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  1. John Eley says:

    One can only hope that somehow this set of facts will motivate the public, the Congress and maybe even the President to realize that insurance companies are not the problem. They may be the long term solution to the reduction in medical costs if we manage to find ways for them to be more profitable and to secure reductions in cost from medical providers. I cannot be too optimistic because facts have never appeared to be all that important to this generation of political leaders.

  2. artk says:

    Profits as a percentage of gross sales is meaningless number for health insurance companies. You have to remember that they are basically financial intermediaries. If you back out the 80 some odd percent of their sales that go out to reimburse medical providers, you’ll find their profit margin is closer to 20%.

  3. John R. Graham says:

    I have to challenge “artk” somewhat. I think most folks who traffic this blog believe that insurers do “too much” and significantly more money needs to be controlled by patients, with prices largely being determined by patients and providers directly.

    Nevertheless, private insurers are not just “financial intermediaries”. Although much of the things they do that they believe add value, such as negotiating contracts with networks of providers, actually do not add value, they provide one key function that the government cannot: They allow the risk of catastrophically expensive medical costs to be borne by voluntary risk capital, rather than taxpayers. This is socially valuable.

    Notwithstanding the malformation of health insurance as it exists today, “backing out” the percent of sales that go to reimburse providers before calculating the profit margin is a red herring similar to “backing out” the payments that carmakers pay to steelmakers, etc. before calculating their profit margins.

  4. artk says:

    John, when a carmaker buys steel, they actually add value. No one would confuse a roll of steel with an car. I defy you to tell me how an MRI I pay for out of pocket is different from an MRI paid for by an insurance company. They are middlemen. That doesn’t mean what they provide has no value, just that they don’t add any value to the medical care I may need.

  5. Devon Herrick says:

    We would all like to think most of our premiums are going for needed care; and that excess profits would be squeezed out through competition. The best way to accomplish that goal has nothing to do with regulating the percent medical loss ratio. For one thing, we rely on third parties to pay bills that would best be left to patients. The role of insurance should be to insure against unexpected occurrences. If we only relied on health insurance to protect us against unlikely risks, the medical loss ratio would not be an issue because insurers would control such a small portion of our health care dollars.

  6. Joe S. says:

    I agree they are middlemen. But if you are going to have third party payment, you have to have a middleman. In this case, however, the middleman is at risk. If you want to know how risky, just take a look at all the insurance companies that are going to be leaving the market in the next few months.

    I certainly have no love lost for insurance companies, but it doesn’t seem to me to be very profitable line of business.

  7. Linda Gorman says:

    I often find that financial intermediaries most valuable. Health insurers let me shift financial risk to them for a monthly premium. It means that if I get sick I don’t lose all my other assets and I can still afford advanced medical care.

    As for the MRI–my insurer doesn’t get involved in MRIs unless I need fairly expensive care. However, it still generates two benefits in the case of an MRI that I have to pay for for something like diagnosing a broken/severely sprained ankle. First, lousy MRI centers typically are not in its network. Second, sometimes it has negotiated lower prices than I can get by paying cash.

  8. Kevin Morrill says:

    This is entirely the wrong way to fight the government take over of healthcare. Profit is virtuous! We should be intellectually skewering anyone that argues otherwise.

    Would we prefer instead that they made no money or operated at a loss!? When you create profit you take in raw resources along with human talent and produce something that’s even better.