Top 5 Health Insurers Raking in the Profits
 

New report came out today that stated:

Top 5 Health Insurance companies:

- saw a 56% increase in PROFITS since 2008
- dropped 2.6 million insurees
- used less of customer premiums on health costs and more on salaries/administrative costs/bonuses


The insurance companies retort is that it's unfair to compare 2009 to 2008, as 2008 was a "down year across the industry".

Health-care insurers netted 56% more in '09 | Columbus Dispatch Politics

This is just one of several stories starting to come out (including huge premium increases in California) shedding a bad light on the insurers.

Will this change anything in terms of the health care reform bill, or will it be shot down and never heard about again?

The only numbers that matter are the ones at the bottom of the article: percent net profit. One of the five sold a division and had a 7.3% net profit. The others ranged from 3.4% to 7.1%. If you are making 2.2% net profit and you have a 56% percent increase in profits, you rise to 3.4% net profits. The "56" number just makes it look naughty. I think it would be important to see how those net profits compare to other industries to see if they are out of line.

As for the bill, I don't think it will change many minds. Those who support the bill will use this as further justification. Those who oppose the bill, do so because they don't want the government to run healthcare (on principle), so their profits won't alter that principle.

To me, the important thing is the correlation between fewer customers and higher profits.

Don't forget the millions of dollars that the CEO's make is before the profits are computed. These bastards are getting rich off of other's miss-fortune

You forgot to add in all the millions the hospitals are making on other people's misfortune. Somehow that money is all lost in the shuffle, everyone just wants to concentrate on 1/2 the problem. There is much more to our health care woes than the 3.5 percent profits the insurance companies are raking in. For us to have real health care reform it will take much more than requiring everyone to get health insurance.

Actually I rant often about the amount of money that the hospitals and doctors are taking. I rant to my doctor friends and they agree with me that everyone is taking too much of a cut causing everything to be very expensive. One of my doctor friends recently told me he didn't think it was fair that he was given a 10% raise in the middle of a recession when health care costs are out of control. The guilty parties include (but are not limited to) doctors, insurance, hospitals, medical suppliers, lawyer happy patients and medical schools.

hospitals/doctors are a huge problem. why does an MRI cost 7X as much in the US than it does in Japan?

The 56% more figure is meaningless by itself. This article is meant to inflame passions. It adds nothing to the debate about health care.

Overall, the profit margin for health insurance companies was a modest 3.4 percent over the past year, according to data provided by Morningstar. That ranks 87th out of 215 industries and slightly above the median of 2.2 percent. By this measure, the most profitable industry over the past year has been beverages, with a 25.9 percent profit margin.

Few companies can simultaneously drop customers and boost profits.

Exactly, more here
CARPE DIEM: Profit Margin: Health Insurance Industry Ranks #86

Profit margin is relatively meaningless when it comes to health insurance companies. Especially when using it as a launching point for a discussion on public vs. private. A significant share of a health insurance company's expenditures is overhead. On top of that, with proper accounting it is very easy to artificially inflate costs (which is beneficial for them, both politically and in fiscal terms). Health insurers have wide latitude in setting "expected future payouts" in its books.

As such, a much better measure of how much money they are actually making is return on equity. That is, how much money investors are receiving based on how much stock they own.
Return on equity for health care insurance: 12.8%
Return on equity for brewers: 14.6%

That is a lot closer, huh?

In fact, over the past ten years health care insurance has had the fifth best return on investment:
http://money.cnn.com/magazines/fortu...tinv/10yr.html

Slightly behind construction and different aspects of the oil industry. You know, those two industries who had huge booms between 98 and 08?

Malpractice insurance and threats of lawsuits.

false. take a look at the states who have passed big tort reform bills and see how they've affected health care costs (hint, they haven't).

the answer is that the doctors own the MRI (or other) equipment and are making money every time it's used.

From what I have read the cost of malpractice and other lawsuits is actually pretty low 1-2%. Yes it adds to the cost and there should be measures to stop frivolous lawsuits but it likely won't lower costs much.

just where did you come up with that little bit of false information?

IMO, it is not meaningless when those five insurance companies control over 75% of the market in 30-40 states.

This according to recent GAO and AMA studies.

I actually took 3 or 4 minutes and looked at the numbers and recent income statements of one of the companies, Cigna. In 2006 they had net income of $1.16 billion. In 2007 it was, $1.11 billion. In 2008 it was $.292 billion. In 2009 it was $1.3 billion. This patterns is not impressive and some of the conclusions being drawn from the data is simply dishonest. the company actually collected less in premiums in 2009 compared to 2008. To really understand the difference, one has to understand the " Run-off Reinsurance" line on the income statement, there was a $.830 billion dollar swing from '08 to '09...this appears to be an accounting rule change. If I invest another minute or two, I could probably find out exactly what it is, but at some point I would expect responsible people to do their own homework.

Also, the "Selling, General & Admin Expenses" ranged from $5.08 billion in 2006 to a high of $5.7 billion in 2009. That is a 12% difference. In 2007 the amount was $5.52 billion and went down to $5.13 billion in 2008. This number tends to fluctuate within a range with a long-term up trend consistent with general business cost increases in this country.

From their recent 8K, costs:
...........................................2009........................2008
Health Care.....................$729.........................715
Disability and Life............$279..........................275
International.....................$182.........................188

In these areas their costs increased year over year with the exception of international operational costs.

EDGAR Pro

companies profit when there are needy people out there?

This isn't much different than when the oil companies were making record profits during the last gas hit $3+ a gallon.

Personally, I don't care that they make profits. I put my money into them via mutual funds and 401k. I want them to make record profits. I'll care when they start making less profits and move my money accordingly.

You should be ashamed of yourself. :D

cyn and cim...it would seem to me that if you are real "free marketeers" you would be interested in a true free market for health insurance.

Do you think that exists now under the current system of state regulation of insurance providers?

I believe there is a safety net for those that cannot provide for themselves for whatever reasons. I have seen that safety net used by friends and family when the time comes.

There should be some sort of basic assistance available, that is not just for healthcare, but for utilities and housing.

I don't understand the whole "free market" thing since discussions here tend to make them bad things. Maybe not in your statement but others that join into the conversation. I have always believed that there should be a free market with some sort of controls for those that cannot provide for themselves.

There's a difference between health care and health insurance in my mind. If I'm paying for health insurance it is for hospital stays and other catastrophic events. People seem to mix the two into the idea that they cannot afford health care on their own out of their own pockets.

How does that in any way refute any of what has been said by anyone in this thread?

In the original post, first bullet point indicated a 56% profit increase from 2008 to 2009. Looking at the income statement of one of the companies gives some insight that refutes the basic premise of the entire argument being presented. Further, it appears there was an accounting rule change in 2008 that may have made the year to year comparison totally worthless. In one regard I was not responding to posts that followed the original post or the belief that health insurance companies are evil, greedy, and exploit innocent consumers, I simply looked at some of the numbers without drawing any morality conclusion. The morality conclusion I did draw was regarding the underlying dishonesty in the manner in which the data was presented.

Well, yes. But as I said, profit margins are far from being adequate representations in a sector where "costs" can be messed around with. Return on equity would be a much better indicator of actual profitability, but that would make these companies look even worse, so I'm guessing they are fine with whatever fumbling of the numbers people do as long as they are using the profit margin as an indicator.

I did some looking at Well Point, note the last paragraph quoting the CEO regarding enrollment:

(WLP) WellPoint Beats Consensus Earnings Estimates | Stock Blog Hub

The point of this is to illustrate there is a lot of stuff going on within this company having an effect on financial results. Isn't kinda foolish or dishonest to come to superficial or political conclusions without actually digging into the numbers?

has anyone mentioned that the posted profit margins don't include the millions in bonuses and lobbying?

Perhaps California should be the test case for single payer. The system in California is arguably the most broken and many insureds are facing large premium increases for valid business reasons. In California they are already moving in that direction, so let's encourage them to do it and let's see what happens in a few years. Let's see if costs go down, let's see if services improve, let's see if the government can do a better job than the private sector. Let's take bonuses and profits out of the picture and give everyone guaranteed heath-care. I am beginning to feel as if it has to be all or nothing, single payer or competitive market, not a hybrid of the two.

Major Advance for California Healthcare Reform as Senate Passes Medicare for All Legislation | Guaranteed Healthcare

Isn't it kinda foolish or dishonest to ignore the actual argument I am making?

I didn't say that they don't actually have costs, and that those costs don't actually fluctuate.

I said that the "margin of profit" is a meaningless number when it comes to companies like health insurance companies, because they can play around with those numbers using stuff like "Expected payouts." Therefore, the return on equity numbers are a better indicator of actual profitability, as it gives you the profit one makes on how much they invested. Well Point, for example, lists its profit margin as 4.1%, but its return on equity was 10.2%. To compare, Anheuser Busch had a profit margin of 13%, and a return on equity of 13%.

If you look at the return on equity for health insurance companies, the return people are getting on their investment is actually among the top anywhere.

You use the term or concept "play around", I would not. The industry is heavily regulated, and the numbers are looked at very closely by independent rating agencies. In addition they have outside analysts looking at the numbers, investors and other stake holders parse the numbers and ask questions. So, to a degree they can try to justify certain assumptions that may be favorable to a short-term political agenda, but those assumptions have to stand up to scrutiny. Please understand I am not for a minute saying I would blindly trust the numbers from a large corporation, just like I question government I question corporate rhetoric - I read the fine print and footnotes, regardless.

Do you understand what I said? Im not going to discuss minutiae with you. The point, which is yet to be acknowledged or understood, is that health care insurers are making a lot of money, a top 5 industry over the past decade, when you actually look at return on investment. The only things more profitable over the past decade were construction (which we all now know was a bubble) and related oil industries (as we reached near all time highs in prices of oil).

Do you understand that?

I do not agree.

I don't know the source of your data but the health care industry is not in the top 5 by any measure I am aware of.

Also, when comparing ROI for service businesses compared to product or manufacturing business is not a fair comparison. A business requiring large inventories, big R&D expenses, or lengthy/complicated manufacturing processes may have a lower ROI but be more profitable than a service business by many other measures. A health insurance company basically collects premiums and pays bills, this does not require a lot of capital compared to other businesses. Even comparing health insurance to some other forms of insurance the capital requirements are very different due to reserve requirements and remember the discussions on IBNR?

Fortune 500 2009: Top Performers - Best Investment Industries: Total Return to Shareholders 10 Yrs

I've posted this already.

Are you correlating stock price returns with relative industry performance and making a judgment about excessive profits? During the past ten years we have had two major stock market declines due to the Dot Com bubble and the real estate/financial sector bubble. An investment in 6 month CD's over the past 10 years would have given you an average return of 3.3% which would have ranked 17 on your chart.

http://www.federalreserve.gov/releas.../H15_CD_M6.txt

A 10 year Treasury Bond purchased in 2000 would have given you a return of 6.3%, rank 11 on your list.

http://www.federalreserve.gov/releas...TCMNOM_Y10.txt

You could have invested in Baa corporate bonds (corporate bonds out performing corporate stock is unusual for a 10 year period) and got about a 7% return over 10 years.

http://www.federalreserve.gov/releas...H15_BAA_NA.txt

All of this tells us nothing other than the obvious. The past 10 years has not been good for equity investments. Your chart conveniently does not go beyond 10 years, which would show a very different picture. I still don't agree with your conclusion. My confusion on your initial point is due to my failure to see a connection between returns on investment in the stock price to the industry being unfairly profitable.

For an entire industry to be able to provide significantly higher than average returns over a decade there needs to be an explanation. It is quite obvious, especially when we compare to the other industries where there are also consistently higher than average returns.

I'll give it a shot.

Health insurance is a mature and stable industry with largely long-term positive growth trends. On a large scale the industry is not going to be subject to short-term economic trends. The stock price over time will reflect the industry stability. Generally, the industry is able to pass increased cost on to consumers and maintain consistent profit margins. The industry is not glamorous it is not high growth. Stock prices generally do not get over-valued, the biggest issue is that they get undervalued. When the stock prices are undervalued, then you will see a period of adjustment. Stock prices tend to be low beta, but they are consistent. On the other hand we have high volatility in many other industries, or high beta industries. You will have periods when health care stocks under perform relative to high beta stocks, generally when people are seeking high growth and are chasing past performance. And you will have periods when people will flock to the security of slow but predictable companies like heath care insurance companies.

In most cases health care insurance companies were not connected with investment banking activities like some other insurance companies, like AIG. Since the health care companies did not have these investment banking components making risky investments their earnings were not impacted.

If Obama's health care plan passes you will see health care company stocks drop like a meteor falling from orbit, because they will be forced into bankruptcy in time.