Nancy Pelosi says that health insurance company profits are “obscene.” An article in yesterday’s Washington Post (and elsewhere) lnotes that health plans are the 35th most profitable of 53 different categories of industry.
Who’s right?
Total insurance company profits are serious money – and the big for-profit national health plans have substantial market capitalization (although the market thinks these five health plans are worth a bit less than half of what the market thought in December, 2007).
Company | Stock | Mkt Cap | From 12/07 |
Aetna | $26.18 | $11.43B | Down 59% |
United | $26.50 | $30.80B | Down 55% |
Wellpoint | $46.70 | $22.19B | Down 48% |
Humana | $37.47 | $6.36B | Down 51% |
Cigna | $28.63 | $7.81B | Down 49% |
Total | $78.59B |
On the other hand, as the Washington Post notes, United made just barely more as a share of revenue than Jack in the Box!
Health insurers have two main businesses. Some of their customers (employers) pay a premium, and the health plan pays about 85% of that premium out in fees to health care providers. Other customers are “self insured.” They don’t prepay for health care for their employees; rather, they pay an administrative fee to health plans, and the health plan pays claims on the employer’s behalf.
The fully insured business is shrinking rapidly, and the self insured business is growing dramatically. This is because federal regulations (ERISA – the Employee Retirement and Income Security Act) treats self-insured employers as their own health plan, as they are thus exempted from any state regulation. Self-insured employers can put limits on coverage that would be prohibited by state regulators would not accept, and can arrange a specialized plan they judge more appropriate for their own employees.
For the fully insured business, the 3-5% return on revenues might be viewed as “obscene,” since 85% of these revenues are just “pass through.” If all of an insurer’s business was insured, you might want to look at the return on the 15% of revenues that are dedicated to the running of the company, so a 3% return on gross revenues would be an effective 20% return on earned revenue. For self-insured business, though, where the insurer is not taking in pass-through dollars, it’s not unreasonable for investors to expect a 3-5% or more return. Remember, we even need nonprofit health insurers to have some profit to build up reserves to tide them over in the event of adverse experience - like for instance a severe swine flu epidemic.
Once again, a note about the fact that Medicare is able to do its administration with only 3% of premium – compared to 12-15% for other health plans. As you can see, profit doesn’t make up the delta. The largest portion of this difference is that Medicare premiums tend to be about $1000 per member per month, and premiums for younger enrollees in employer-based health plans are about a third of this. Medicare does pay more claims per beneficiary – but comparing just percentages of premium for administrative costs is like comparing apples to skateboards.
