T Nation

Health Insurance Profit Margins

Haven’t been on here for quite awhile, but thought this was worth posting.

http://news.yahoo.com/s/ap/20091025/ap_on_go_co/us_fact_check_health_insurance

Good read. Already knew this, but more people need to know.

This post was flagged by the community and is temporarily hidden.

[quote]pushharder wrote:
Beowolf wrote:
Good read. Already knew this, but more people need to know.

Yeah, Harry Reid needs to know.[/quote]

…and all five of us will be misled.

What falsehoods can lie in what seems a simple statisitic?

It has to do with ledgering. I will leave out the amortization of mergers and acquisitions, the bookkeeping fiction of charges “incurred but not reported,” etc.

I point out that insurance companies have two revenue streams: investment earnings on the premiums, and the margin withheld on the premiums themselves.
In this last year, all investment classes nosedived, and an insurance company would claim the losses against the premium collection and claim a very low “profit” ratio. I find the medical loss ratio–or payout ratio–of greater interest:


(Not the best or most earnest citation; note the horrendous error in the second paragraph.)

Of course, we might assume that, if the retention ratio has soared from 5% to 20%, there might be justifiably greater costs of administration. But 4 times greater? No, unless we consider justified the bloated salaries, and the administrative tangle whose intention is to prevent payment for services.

In short, this statistic was published in order to be misleading. The health insurance companies, over the last 15 years, have changed their business model, and chiefly profit from withholding health coverage of the premium payors. If the “profit” on the health insurance dollar has increased from 5% to almost 20%, the benefit to the insured must be commensurately decreased.

Not that that observation benefits Mr. Reid’s position. There is nothing in these bills and proposals to contain costs or to assure that the payout ratio be reasonable, or serve the public. (Competition from a public option will not achieve this.) Instead, all of them assure the insurance companies that their market is enlarged and subsidized.

[quote]DrSkeptix wrote:
pushharder wrote:
Beowolf wrote:
Good read. Already knew this, but more people need to know.

Yeah, Harry Reid needs to know.

…and all five of us will be misled.

What falsehoods can lie in what seems a simple statisitic?

It has to do with ledgering. I will leave out the amortization of mergers and acquisitions, the bookkeeping fiction of charges “incurred but not reported,” etc.

I point out that insurance companies have two revenue streams: investment earnings on the premiums, and the margin withheld on the premiums themselves.
In this last year, all investment classes nosedived, and an insurance company would claim the losses against the premium collection and claim a very low “profit” ratio. I find the medical loss ratio–or payout ratio–of greater interest:


(Not the best or most earnest citation; note the horrendous error in the second paragraph.)

Of course, we might assume that, if the retention ratio has soared from 5% to 20%, there might be justifiably greater costs of administration. But 4 times greater? No, unless we consider justified the bloated salaries, and the administrative tangle whose intention is to prevent payment for services.

In short, this statistic was published in order to be misleading. The health insurance companies, over the last 15 years, have changed their business model, and chiefly profit from withholding health coverage of the premium payors. If the “profit” on the health insurance dollar has increased from 5% to almost 20%, the benefit to the insured must be commensurately decreased.

Not that that observation benefits Mr. Reid’s position. There is nothing in these bills and proposals to contain costs or to assure that the payout ratio be reasonable, or serve the public. (Competition from a public option will not achieve this.) Instead, all of them assure the insurance companies that their market is enlarged and subsidized.[/quote]

This is an interesting point but to call the 20% not paid to service providers “profit” is ridiculous. I would also question that this number was ever as low as 5%. I have a hard time believing you could run a company on 5% of revenue. I will conceed that you don’t pay salaries and other expenses with % points, and that increased volume can lead to smaller profit margines. I will also conceed that I am not an accountant, but that seems off to me.

Even if we accept this as truth. Some portion of the 20% goes towards operational expenses. If there were to be a gov’t option, does anyone really think it will cost the the tax payers less than 20% in bureaucratic oversight and fraud? I would have to go back and look, but I believe conservative estimates put medicaid or medicare at 30%. As the programs grow, so does the % lost to fraud and inefficient oversight.

With profit motive, comes efficiency. There is also motive for abuse and fraud. Only competition can put this in check. As you say, this is not being addressed.

We really need to decouple heath insurance from employment. Doing this and opening the door for competition, will likely be the end of the third party payer system and prices for actual care will drop. This will go along way in solving the pre-existing condition argument.

With a gov’t option, abuse and fraud come from the recipients instead of the provider, and there is very little motive for efficiency as we have seen.

[quote]DrSkeptix wrote:
pushharder wrote:
Beowolf wrote:
Good read. Already knew this, but more people need to know.

Yeah, Harry Reid needs to know.

…and all five of us will be misled.

What falsehoods can lie in what seems a simple statisitic?

It has to do with ledgering. I will leave out the amortization of mergers and acquisitions, the bookkeeping fiction of charges “incurred but not reported,” etc.

I point out that insurance companies have two revenue streams: investment earnings on the premiums, and the margin withheld on the premiums themselves.
In this last year, all investment classes nosedived, and an insurance company would claim the losses against the premium collection and claim a very low “profit” ratio. I find the medical loss ratio–or payout ratio–of greater interest:


(Not the best or most earnest citation; note the horrendous error in the second paragraph.)

Of course, we might assume that, if the retention ratio has soared from 5% to 20%, there might be justifiably greater costs of administration. But 4 times greater? No, unless we consider justified the bloated salaries, and the administrative tangle whose intention is to prevent payment for services.

In short, this statistic was published in order to be misleading. The health insurance companies, over the last 15 years, have changed their business model, and chiefly profit from withholding health coverage of the premium payors. If the “profit” on the health insurance dollar has increased from 5% to almost 20%, the benefit to the insured must be commensurately decreased.

Not that that observation benefits Mr. Reid’s position. There is nothing in these bills and proposals to contain costs or to assure that the payout ratio be reasonable, or serve the public. (Competition from a public option will not achieve this.) Instead, all of them assure the insurance companies that their market is enlarged and subsidized.[/quote]

And guess which insurance company has the highest denial rates in the industry?

http://healthcare-economist.com/2008/06/30/medicare-more-likely-to-deny-claims-than-commerical-health-insurers/

[quote]dhickey wrote:
DrSkeptix wrote:
pushharder wrote:
Beowolf wrote:
Good read. Already knew this, but more people need to know.

Yeah, Harry Reid needs to know.

…and all five of us will be misled.

What falsehoods can lie in what seems a simple statisitic?

It has to do with ledgering. I will leave out the amortization of mergers and acquisitions, the bookkeeping fiction of charges “incurred but not reported,” etc.

I point out that insurance companies have two revenue streams: investment earnings on the premiums, and the margin withheld on the premiums themselves.
In this last year, all investment classes nosedived, and an insurance company would claim the losses against the premium collection and claim a very low “profit” ratio. I find the medical loss ratio–or payout ratio–of greater interest:


(Not the best or most earnest citation; note the horrendous error in the second paragraph.)

Of course, we might assume that, if the retention ratio has soared from 5% to 20%, there might be justifiably greater costs of administration. But 4 times greater? No, unless we consider justified the bloated salaries, and the administrative tangle whose intention is to prevent payment for services.

In short, this statistic was published in order to be misleading. The health insurance companies, over the last 15 years, have changed their business model, and chiefly profit from withholding health coverage of the premium payors. If the “profit” on the health insurance dollar has increased from 5% to almost 20%, the benefit to the insured must be commensurately decreased.

Not that that observation benefits Mr. Reid’s position. There is nothing in these bills and proposals to contain costs or to assure that the payout ratio be reasonable, or serve the public. (Competition from a public option will not achieve this.) Instead, all of them assure the insurance companies that their market is enlarged and subsidized.

This is an interesting point but to call the 20% not paid to service providers “profit” is ridiculous. I would also question that this number was ever as low as 5%. I have a hard time believing you could run a company on 5% of revenue. I will conceed that you don’t pay salaries and other expenses with % points, and that increased volume can lead to smaller profit margines. I will also conceed that I am not an accountant, but that seems off to me.

Even if we accept this as truth. Some portion of the 20% goes towards operational expenses. If there were to be a gov’t option, does anyone really think it will cost the the tax payers less than 20% in bureaucratic oversight and fraud? I would have to go back and look, but I believe conservative estimates put medicaid or medicare at 30%. As the programs grow, so does the % lost to fraud and inefficient oversight.

With profit motive, comes efficiency. There is also motive for abuse and fraud. Only competition can put this in check. As you say, this is not being addressed.

We really need to decouple heath insurance from employment. Doing this and opening the door for competition, will likely be the end of the third party payer system and prices for actual care will drop. This will go along way in solving the pre-existing condition argument.

With a gov’t option, abuse and fraud come from the recipients instead of the provider, and there is very little motive for efficiency as we have seen.[/quote]

I just want to point out that I do understand how they could make money, that goes towards covering expenses and administrative cost, with other investments and income. This is all well and good when those investments are paying off. If they are not, something has to cover expenses and administrative costs. Obviously they will be under pressure not to raise rates, and this may very well lead to approving fewer claims.

I have recently experienced this myself. Claims and services that went through before have recently been denied. I can’t really complain, as they shouldn’t have been covered before but were allowed to slide. I certainly didn’t read the fine print and this is not my insurance companies fault. The other thing that is often at work is providers that will tell you something is covered, when in fact it may not be. Nobody talks about this, but it has happened to me more than once.

Go to specialist to explore TRT. Give them my insurance card, they tell me I will be charged a $15 co-pay. Insurance company only covers a portion of it. I get copied on a letter from the doctor, to my insurance company, explaining that my card did not have the necessary details to tell the doctor what would be covered. They claimed that this was a common problem.

Instead of telling me about this common problem and verifying coverage with my insurance company, they sent me a bill for $1k. At no time did they disclose any costs other than the $20 co-pay. At no point did they alert me to this common problem with cards issued by my insurance company. Tell me this isn’t questionable.

I can understand the frustration, and devastation for some, when an insurance company denies a claim. Individual cases will continue to infuriate some. They only solution to this is competition. Companies that deny claims they should not be denying will not only spend more time in court, they will also earn a reputation for this practice.

[quote]dhickey wrote:
DrSkeptix wrote:
pushharder wrote:
Beowolf wrote:

This is an interesting point but to call the 20% not paid to service providers “profit” is ridiculous. I would also question that this number was ever as low as 5%. I have a hard time believing you could run a company on 5% of revenue. I will conceed that you don’t pay salaries and other expenses with % points, and that increased volume can lead to smaller profit margines. I will also conceed that I am not an accountant, but that seems off to me.

Even if we accept this as truth. Some portion of the 20% goes towards operational expenses. If there were to be a gov’t option, does anyone really think it will cost the the tax payers less than 20% in bureaucratic oversight and fraud? I would have to go back and look, but I believe conservative estimates put medicaid or medicare at 30%. As the programs grow, so does the % lost to fraud and inefficient oversight.

With profit motive, comes efficiency. There is also motive for abuse and fraud. Only competition can put this in check. As you say, this is not being addressed.

We really need to decouple heath insurance from employment. Doing this and opening the door for competition, will likely be the end of the third party payer system and prices for actual care will drop. This will go along way in solving the pre-existing condition argument.

With a gov’t option, abuse and fraud come from the recipients instead of the provider, and there is very little motive for efficiency as we have seen.[/quote]

I did not call the payout ratio a form of “profit.” I was pointing to the disingenuous use the term “profit” in that article.
You may not believe that the insurance companies formerly ran on a 95% payout, but, for the most part, they did. Their portfolio at one time included other insurance products, but now, companies like Cigna and Aetna are almost completely dominated by the health insurance docket: it is simply more profitable. Second, you may not be old enough to remember, but Blue Cross and Blue Shield, which merged in 1982 to form what I call “the Blue Double-Cross,” were once non=profit companies–almost charities, paying out nearly every nickel collected. Their profit was indeed generated by interest and dividends on the invested premiums paid by the members. (In Reagan’s Tax Reform Act of 1986, the untaxed status of these organizations ended, and this initiated the cascade to fully for-profit businesses.)

A little Googling on “health insurance executives compensation” may be entertaining.

I respect you other opinions as well.
My point: if health insurance serves a public function, and if it is about to get all 'swole with new cash flow–subsidized by taxpayers–is there not a public interest in payout ratio by which these companies profit?

This post was flagged by the community and is temporarily hidden.

So who in the health care system is actually making a profit? Hospitals, doctors, and insurance companies all claim to be scraping the barrel for nickels.

[quote]borrek wrote:
So who in the health care system is actually making a profit? Hospitals, doctors, and insurance companies all claim to be scraping the barrel for nickels. [/quote]

Lawyers.

[quote]borrek wrote:
So who in the health care system is actually making a profit? Hospitals, doctors, and insurance companies all claim to be scraping the barrel for nickels. [/quote]

AAs and CRNAs?

[quote]DrSkeptix wrote:
What falsehoods can lie in what seems a simple statisitic?

It has to do with ledgering. I will leave out the amortization of mergers and acquisitions, the bookkeeping fiction of charges “incurred but not reported,” etc.

I point out that insurance companies have two revenue streams: investment earnings on the premiums, and the margin withheld on the premiums themselves.
In this last year, all investment classes nosedived, and an insurance company would claim the losses against the premium collection and claim a very low “profit” ratio. I find the medical loss ratio–or payout ratio–of greater interest:


(Not the best or most earnest citation; note the horrendous error in the second paragraph.)

Of course, we might assume that, if the retention ratio has soared from 5% to 20%, there might be justifiably greater costs of administration. But 4 times greater? No, unless we consider justified the bloated salaries, and the administrative tangle whose intention is to prevent payment for services.

In short, this statistic was published in order to be misleading. The health insurance companies, over the last 15 years, have changed their business model, and chiefly profit from withholding health coverage of the premium payors. If the “profit” on the health insurance dollar has increased from 5% to almost 20%, the benefit to the insured must be commensurately decreased.

Not that that observation benefits Mr. Reid’s position. There is nothing in these bills and proposals to contain costs or to assure that the payout ratio be reasonable, or serve the public. (Competition from a public option will not achieve this.) Instead, all of them assure the insurance companies that their market is enlarged and subsidized.[/quote]

This argument - both sides - is moot for a couple of reasons. First, it is nobody’s business but the shareholders what the profit margin is.

Second, both articles are wonderful examples of poor journalism. You rightfully point out the multiple income streams of an insurance company, and this would account for the paltry 2.2% profit claimed last year towards the end of the article. However, the article begins by saying Health insurance profit margins typically run about 6 percent, give or take a point or two. No source is cited for this, and nowhere do they clarify what ‘typically’ means. Is this what they made in 2007? 2006? the last 5 years?

The huff-post is no better, as you mentioned the second paragraph is horrible, but even the 80% medical loss ratio is supported only by an interview of Wendell Potter by Bill Moyers. I don’t have much faith in either of these three sources: the huffington post, Potter, or Moyers.

This may be a more interesting debate with more reliable data, again on both sides, but I would still fall back to my original statement.

The biggest question I had while reading the first article was how they factored mutual companies into this. I am assuming they did not factor this into the profit margin figure, so I am only left to wonder why they did not mention that many health insurance companies voluntarily operate on a 0% profit margin.

[quote]borrek wrote:
So who in the health care system is actually making a profit? Hospitals, doctors, and insurance companies all claim to be scraping the barrel for nickels. [/quote]

Why the answer is simple, the drug companies.

[quote]Schlenkatank wrote:
borrek wrote:
So who in the health care system is actually making a profit? Hospitals, doctors, and insurance companies all claim to be scraping the barrel for nickels.

Why the answer is simple, the drug companies.[/quote]

I’d almost believe that if I didn’t live down the street from Pfizer’s empty global research center. I work in the research centers of Abbott labs, Eli Lilly, and Pfizer and if they are taking all the cash then they must have a big choo-choo chugging around the country that is run on burning greenbacks. The employees tell me non-stop about funding cuts, shift layoffs etc.

[quote]borrek wrote:
Schlenkatank wrote:
borrek wrote:
So who in the health care system is actually making a profit? Hospitals, doctors, and insurance companies all claim to be scraping the barrel for nickels.

Why the answer is simple, the drug companies.

I’d almost believe that if I didn’t live down the street from Pfizer’s empty global research center. I work in the research centers of Abbott labs, Eli Lilly, and Pfizer and if they are taking all the cash then they must have a big choo-choo chugging around the country that is run on burning greenbacks. The employees tell me non-stop about funding cuts, shift layoffs etc.
[/quote]

It’s true that they have been downsizing in the past 5 years or so, but downsizing a giant like pfizer still makes them one of the largest companies in the world. In fact, Pfizer is well above the average profit of all fortune 500 companies. They have gained far to much influence on our government and market their products for far more than what they are worth. They also make healthcare less affordable.

This clip is pretty clever.

[quote]DrSkeptix wrote:
dhickey wrote:
DrSkeptix wrote:
pushharder wrote:
Beowolf wrote:

This is an interesting point but to call the 20% not paid to service providers “profit” is ridiculous. I would also question that this number was ever as low as 5%. I have a hard time believing you could run a company on 5% of revenue. I will conceed that you don’t pay salaries and other expenses with % points, and that increased volume can lead to smaller profit margines. I will also conceed that I am not an accountant, but that seems off to me.

Even if we accept this as truth. Some portion of the 20% goes towards operational expenses. If there were to be a gov’t option, does anyone really think it will cost the the tax payers less than 20% in bureaucratic oversight and fraud? I would have to go back and look, but I believe conservative estimates put medicaid or medicare at 30%. As the programs grow, so does the % lost to fraud and inefficient oversight.

With profit motive, comes efficiency. There is also motive for abuse and fraud. Only competition can put this in check. As you say, this is not being addressed.

We really need to decouple heath insurance from employment. Doing this and opening the door for competition, will likely be the end of the third party payer system and prices for actual care will drop. This will go along way in solving the pre-existing condition argument.

With a gov’t option, abuse and fraud come from the recipients instead of the provider, and there is very little motive for efficiency as we have seen.

I did not call the payout ratio a form of “profit.” I was pointing to the disingenuous use the term “profit” in that article.
You may not believe that the insurance companies formerly ran on a 95% payout, but, for the most part, they did. Their portfolio at one time included other insurance products, but now, companies like Cigna and Aetna are almost completely dominated by the health insurance docket: it is simply more profitable. Second, you may not be old enough to remember, but Blue Cross and Blue Shield, which merged in 1982 to form what I call “the Blue Double-Cross,” were once non=profit companies–almost charities, paying out nearly every nickel collected. Their profit was indeed generated by interest and dividends on the invested premiums paid by the members. (In Reagan’s Tax Reform Act of 1986, the untaxed status of these organizations ended, and this initiated the cascade to fully for-profit businesses.)

A little Googling on “health insurance executives compensation” may be entertaining.

I respect you other opinions as well.
My point: if health insurance serves a public function, and if it is about to get all 'swole with new cash flow–subsidized by taxpayers–is there not a public interest in payout ratio by which these companies profit?[/quote]

Yep, I got where you were coming from and do understand that ratios of premiums to payouts may have indeed been that high, but to portray this as profit is just silly, and to imply that they once covered their cost with 5% of revenue is silly. As you pointed out.

Again, if those investments that whre paying for expenses are no longer doing so, it is only logical that that expenses must be covered by premiums. I have no idea how they invest premiums as they are collected, but maybe interest rates at zero and bubble inducing policies are the best policy for keeping investments safe and productive.

The payout ratio should not be mandated. How can gov’t do this and continually fuck with the economy and the only other source of income they have, investments? This will only lead to less competition. We seem to have witnessed much higer payout ratios when investments were doing well. It seems to me that less fucking with the economy in general would lead to predictable an stable investment returns an higher payout ratios. Just leaving interest rates alone would provide for nice returns on savings. You knock out insane inflation rates and get rid of disinsentives to competition, and we are golden. No mandates needed.

Executive compensation seems to be a hot topic lately and one I will never understand. Any time you cap prices (directly or indirectly) you induce shortages. Wages are no different than any other prices. It amazes me that anyone would think artificially limiting executive compensation will not lead to less productive executives.

If they pay an executive 10m less and the company loses 15m in productivity, at least people will feel better knowing someone is making 10m less. I will never understand the assumption that someone will always do the same job for substantially less.

If you don’t like what an executive is making, don’t invest and don’t buy what they are selling. If all executives in that industry are making that, I would tend to think that’s the going wage and what they are worth to the company’s bottom line.

[quote]borrek wrote:
So who in the health care system is actually making a profit? Hospitals, doctors, and insurance companies all claim to be scraping the barrel for nickels. [/quote]

The regulators. They provide nothing and yet still get paid for their “services”.

[quote]LIFTICVSMAXIMVS wrote:
borrek wrote:
So who in the health care system is actually making a profit? Hospitals, doctors, and insurance companies all claim to be scraping the barrel for nickels.

The regulators. They provide nothing and yet still get paid for their “services”.[/quote]

Regulators? Could you be more specific by what you mean?

This is another completely ahistorical, made-up axiom repeated like catechism by conservatives. There’s no profit motive in the Europe’s single-payer health systems, yet they’re more efficient than ours.