First it is important to understand the difference between profit and profit margin. Profit is what's left over after all of your costs and taxes are covered. Profit margin is the percentage of revenue that is left over after all costs and taxes are covered. For example, if the amount of money you take in from sales is $1,000 and you have $150 left over after all of your costs and taxes are covered then your profit margin is 15%. Ask yourself real quick, what do you think is an acceptable profit margin for a business to sustain? 10%? 20%? 30%? My guess is that most people would say that it is acceptable for a business to make $1 or $2 for every $10 they receive, putting their profit margin somewhere between 10% and 20%.
Keep in mind the profit margin you think is acceptable for a business to sustain. Do you know what the profit margins are for some of the biggest health insurers in the U.S.? Inspired by a Wall Street Journal article yesterday, I did some research and found that the average profit margin in 2008 for four of the big guys, UnitedHealth Group, Aetna, Humana and WellPoint, was 3.6%. Yes, you read that correctly. For every $100 that one of these companies takes in they keep $3.60. Some people might say "well, the economy was a bad in 2008. They probably made 10+% the year before." Nope. We would all agree that 2006 and 2007 were phenomenal years for the economy, and the average for the four companies was just over 5%.
In contrast, Coca-Cola's average three year profit margin for the same years was over 20%, and Apple, the company that makes your iPod, had a profit margin of 13.3%. Yes, these are companies that make discretionary items, but food isn't. General Mills, the company that makes a lot of the cereals and other foods that you eat every day, had a profit margin almost twice as high as that of the insurance companies, 9.3%, over the same period. We need both health care and food to live, so why are we letting the company that makes Cheerios make profits twice as high as the "windfall[s]" of the health care companies?
The truth is that the health insurance companies are not making outsized profits. Compared with many other companies their profit margins are very small. We have heard members of Congress, Obama and others say that we need a public "option" to compete with the private insurers. The private firms already compete with each other. If Aetna wants to expand into another state they must lease office space, hire employees and spend money complying with the individual state insurance mandates. If they take in $100 for a premium and pay out $100 for benefits, as Obama and many Democrats wish, then where do they get the money to do this? In order to fund expansion and compete the companies need profits. Profits are an essential element of competition. If the insurance companies did not make profits then you might be stuck with one insurance company in your state, but due to open markets (somewhat) and profits we have a range of companies to choose from. Regardless of this fact we still have people telling us that the insurance companies do not need to make profits and do not have enough competition. It just doesn't make sense. Facts are pesky little things for the people attempting to lie to us, aren't they?
21 comments:
You're right, insurance companies are horribly inefficient. We should have a public option.
Your comparing two different kind of industries and expecting the same profit margins. Don't think it works that way. Example… most manufacturing of processed foods (Coca-Cola and General Mills) today are so automated, the only thing a human is involved with is putting ingredients in the mixer and way down the line, putting the cases of finished product in to truck for transport. An over simplification but you get my drift. The amount of human intervention compared to product produced in miniscule.
As far as iPods and other products as such, things that you’re not taking into account the mass production of thousands of units that are identically the same, low oversea labor rates, and the vanity reflex of the American public to purchase the latest greatest electronics at whatever the price.
The insurance industry by comparison is labor intensive that requires trained staff to sell, process and service the hundreds of thousands of clients. You simple can’t compare the industries you’ve listed.
Just curious, was that profit margin before or after bonuses?
Besides the issue of bonuses and executive salaries in general, one must also consider volume. 3.6% of $100 isn't much. 3.6% of 100 BILLION dollars is 3.6 Billion dollars, alot of money.
Your information about the relatively small profit margins of some health insurers compared to some other companies has indeed changed some of my outrage over their 428% *growth* in profits from 2000-2007 into uncertainty.
And then of course there is the whole issue of what kind of funy accounting do they practice.
I could be wrong, but my my research says that the profit margins reported by insurance companies typically are net after a lot of "operations" that actually have little to do with their core business of insurance and more to do with investing in the stock market as a hedge against swings in claims paid. Many of the studies I've read say that the swings in the stock market are more predictive of the rise and fall in medical malpractice insurance premiums for doctors than are the aggregate malpractice verdicts/settlements for that same year.
This is totally irrelevant and I don't understand why people are so focused on it. The real question is why should health insurance companies be allowed to make any profit at all? Any profits they make are being sucked out of the system, money that could be used to treat people. Additionally, a profit motive is a huge incentive to deny coverage. People are worried about a government plan rationing care for lack of funds, well, how much worse is it to ration care to increase profits! You are assuming that health insurance companies are actually adding value somehow, I think that assumption is misplaced. You are missing the entire point of this debate!
If you think your health is a product comparable a Coca-Cola you can't be helped... just continue watching FOX TV... I have lived half of my life in Germany and France and half in the US and I can tell you I admire the GOP for the lies and horror stories they disseminate about European heath care. It is phenomenal that about half of the Americans fight to keep the profit margins of the Health insurers up as if they are all share holders. I like capitalism when I choose a TV or car but keep my health care, education and retirement out of the hands of profiteurs...
Vivifiant, Ohio
The value of insurance companies is that they provide pooling of risk for losses that we cannot afford. It does not make sense to insure a small risk that you can easily afford. But, for big risks that occur infrequently insurance is a wise investment. Without insurance, we could not get a property or businees loan and most of us could not afford to do without at least catastrophic health coverage.
Unlike the government, private insurers have actual reserves mandated by the states in which they operate. These reserves provide both a source for investment income and for payment of claims and legal fees (folks often forget that coverage of legal fees is part of insurance).
Insurance companies as a group (both health and property) generally earn only a few percent on their premium income. In many years they actually have a loss on the premium income, sometimes offset by the investment income.
I was once told that insurance companies are competitive like a firing squad standing in a circle. This is true because price comparison among companies and policies is rampant.
Insurance rates are regulated at the state level and all 50 states have an insurance commissioner who is charged with this responsibility. Until this health care debate, it was recognized that the rates must be actuarial sound. That is they must be adequate, but not excessive.
In this debate we are focused on social issues, so the value of insurance is in question. It still makes sense and if it did not then all of the current plans in Congress would not be insurance based. The public option is a government operated insurance company. Single payer is not, but that option is not in any of the plans.
I am reluctant to endorse a public option, because I believe the power to tax, regulate and operate a business should not all be invested in the same person or entity (especially a political entity). I worked 2 years on a large government project and there was a lack of ownership and waste of resources. I would not want to do it again and I would not want this to be a way that our tax dollars are spent.
To make sense out of this debate we have to remain honest and picking insurance companies as the bad guys is not the way to do it.
Typical responses, Republicans always spout off about profit margins which, funny enough take greed out of the equation. Look at exxon, they profit 50-60 billion and all the republicans can say is..................well their margins are only bla bla bla. The health insurance companies like the oil companies are in collusion to keep prices high. My opinion of course. Look people, greed has taken over in this country, and it's sickening.
The former boss at united health care (insurance company perhaps?) back datred stock options for years (not illegal) so he could make over 100 million per year. For several years. Why wasn't 10-20-30 million enough? No, he had to make 10 times that much. What a pig, all the while millions don't have insurance.
You're absolutely correct in saying insurance companies need to make profit. That's the problem, they have no legitimate claim to existence. So what if their profit margins aren't that big, they are highly inefficient to begin with and their very existence drives costs up. Access to healthcare makes no business sense, therefore we shouldn't treat it like one.
Any component of healthcare delivery that does not add value needs to be eliminated.
USPS, Fannie Mae, Freddie Mac, Amtrak. All are government run private companies. All run HUGE loses every year, carried by taxpayers and bailouts... This was the trend long BEFORE the economy down turn. FYI they too paid bonuses. 75419 is the average pay for a governmant employee, thats almost 20k more than the private industry. I dont have the heart to include the benefits average associated with these government employees. In times like this, when we eat in, travel less and just try to save would we ever welcome the obvious increased tax burden???
Your being a "real conservative" has biased your article before you even typed the first letter. Explain this, how does politics and profit fit into the health and well being of citizens?? How are going to explain your "conservative" leanings when one of your family or friends is without insurance and becomes sick and can't afford to pay the medical bills? Are you going to tell them, it's okay because the insurance company is not making that much by way of "profit margin"?? You need to do some more growing up son and realize that the health care debate isn't about profit or what political party you follow, it's about people living or dying because of what they can and can't afford when it comes to health care.
case in point:
Wellpoint, '08:
operating revenues: $61.6 billion
benefit expense: $47.7 billion
Thus 30% of the revenues are getting sidetracked from patient care to pay for things like lobbying, CEO, CFO, VP1, VP2, ... VP9 pay, marketing, lobbying, advertising, lawsuits, lobbying, etc.
I cannot believe that a central governing body, i.e. bureaucracy, that hires doctors and nurses, hands out health cards and keeps records couldn't do it more efficiently.
Not too mention the countless headaches, stress, and untold grief this system causes millions upon millions of Americans.
The higher profits from 2000 - 2007 were largely due to Market returns.
Insurance companies invest parts of your premiums into the stock markets.
The markets yielded extraordinary returns between 2000 and 2007.
Obama and his minions are cherry picking their words and arguments by using half-truths and facts taken way out of context.
Hey anonymous, how about you get a job and purchase you own god damn insurance instead of relying on government programs subsidized by me.
Effing loser.
@Wellpoint Example
How does 23% = 30%? Go back to 4th grade and learn basic math.
Even still, taking your raw numbers. $61.6 billion - $47.7 billion = $13.9 billion. That's what, 40,000+ employees?
That's a pretty hefty sum. Or maybe it's not considering how many offices they probably have. And how much they pay in utility bills, or in sales fees to insurance brokers, or in capitol expenditures for replacement equipment to run the company.
However, if you think you can run a company better organized and costing less to consumers, go do it. I'm sure people will run your direction when you have lower premiums and better coverage...
Damn those Republicans and their ignorant reliance on understanding how business and economics actually work! Damn them for not allowing "us" to decide whether or not we "allow" people to keep the results of their work! Damn them for wanting to protect the public from being forced to abide by your whims! They're so HORRIBLE!
Health care is not a commodity. Every first-world country on the planet except the US has universal health care.
In my country our dogs get better health care than your uninsured.
The REAL question is how much of your premium dollar goes to actual health care?
The answer is 60% for private insurers. For Medicare, it's 96%.
The 36% gap is due to profits, obscene salaries, bonuses, marketing, lobbyists, supporting entire departments dedicated to find ways out of paying claims, more bureaucracy, attorneys, that private insurers pay out to secure their (measly) profits.
Striking the balance between profits, operational costs, premiums, personal accountability, and really expensive ailments simply cannot be trusted to only those exempt from "anti-trust" laws, or corrected by those that enjoy some form of corporate kickback.
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