Health Insurance Profits

Sarah Kliff’s recent publication on VOX was nicely done and covered many of the ways in which our health care system is broken. I would add that the disappearance of primary care is another important factor and contributes to the high average cost per office visit and the incentives toward expensive specialist procedures.

One area of the presentation needs further discussion and that is health insurance company profits. Ms. Kliff uses the measure promoted by the American’s Health Insurance Plans (AHIP) under the term “net profit” which refers to dollars left over after all the rest has been spent (roughly 3%). But that doesn’t mean spent on health care. That includes the 15%-20% spent on administrative costs, paper shuffling, lobbying costs, advertising, and multi-million dollar executive compensation packages. A more appropriate metric would be the Return on Equity (ROE) which runs at 12.1% for Health Care Plans. Health insurance is a no-value-added industry. The companies do not take care of people, they do not provide medical care, they do not create or build anything. They are pass-through operations that take the money in (premiums), remove 15%-20% of it, and pass the rest on (trying hard to find ways not to pass it on). That’s the policy holders’ money that they are passing through. They are getting that 3% net profit on other people’s money; not their own money. That’s just free money for them. Their own money is their equity. And their return on that is 12.1%. As much as I admire Uwe Reinhardt I can’t really agree with him when he says, “The profits of insurance companies are truly a trivial part of national health spending.” With premiums totaling $738,889,000,000 I think they play a significant role in our spending. Of course, it is understood, that with government agencies paying for 60% of our health care in the U.S. this discussion is about the remaining 40% (less OOP).

 Health total premiums                                

If there is any doubt that the insurance companies are making plenty of money we need only to look at the compensation for their CEO’s (not to mention all of their CFO’s, CIO’s, and vice-presidents of…,etc.).  For example, in 2013 the CEO’s of the top 11 for-profit companies received a total of more than $125 million.

Health Insurance Info 2014_Table

And, of course, their stockholders are happy with 18% to 34% increases in the stock values in the last year.

We should all keep in mind that however we define “profits” in the health care insurance industry we are really talking about money gained from avoiding payment of medical bills.

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