Thinking About Thinking

Just How Profitable are Healthcare Insurers?

Posted in Economy by larrycheng on March 8, 2010

After reading this blog post on healthcare and hearing the rising volume against healthcare insurers – I wanted to understand more clearly the profitability of healthcare insurers.  So, I went to Google Finance, searched for Aetna, got a list of their competitors – and researched their net profit margins.  Here they are:

2009 Net Profit Margin of Healthcare Insurers

I’m not here to defend or attack healthcare insurers.  But, 3.7% median net margins seems relatively pedestrian to me – not obviously indicative of an industry gouging its customers.  For example, if you look at the profitability of Google and its competitive set, here’s what it looks like:

2009 Net Profit Margin of Internet/Tech Companies

Given all of the noise around healthcare insurers being the bad actor in the healthcare delivery equation – I would have thought they’d be more profitable.  But, to be fair, profitability margins are only one variable in the complex analysis on our healthcare challenges.  We hope that our portfolio companies like Redbrick Health and Ventana can help be part of the solution. 

35 Responses

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  1. Reader2read said, on March 8, 2010 at 4:51 pm

    I highly recommend reading this short piece. Even though the profit margin is so small for Health Insurance Companies, “the better measurement is not profit, but return on invested capital (ROIC). ”
    One more line from the article: “If I had a business that consisted of people giving me $100 bills and me paying them back $96, it would be silly to describe that as a very low-profit industry.”

    Source: The Economist

    Link to Article: http://www.economist.com/blogs/democracyinamerica/2010/03/health_care_reform

    • larrycheng said, on March 8, 2010 at 9:29 pm

      Reader2read, thanks for the link to the article. I’m not sure I totally agree with the quote actually since the $100 and $96 aren’t fixed. If they were fixed, I’d agree, but revenue and costs in healthcare fluctuate.

      • Reader2read said, on March 9, 2010 at 4:28 pm

        First of all, I want your readers to know that The Economist is not a left-leaning organization. They are one of the strongest pro-free market advocates out there. And, whatever their leaning, they have a reputation for backing up their views with numbers.

        Some more points from the article:

        They’re just collecting premiums and paying bills, plus a lot of administration and advertising. If I had a business that consisted of people giving me $100 bills and me paying them back $96.

        ROIC measures how much money it takes to set up and run an insurance company, versus how much profit it brings in. …..Based on that, it is about 16%.

  2. B.W. McAdams said, on March 8, 2010 at 4:55 pm

    Yes, and Google, Yahoo, Apple, etc don’t get to decide if their customers get the heart transplant they so desperately need.

    These companies need to be operating as not-for-profits, or coops. Their motivations between decisions should be driven by what’s best for their members, NOT what’s best for their pocketbooks. No matter whether it’s a profit margin of 1% or 10% or 1000%.

    • larrycheng said, on March 8, 2010 at 9:31 pm

      B.W. McAdams, do you believe that the whole supply chain then should be not-profit as well? In other words, should the same principle apply to the pharmaceutical companies and medical device companies – perhaps to practitioners as well?

      • rodneyhytonen@frontier.com said, on December 27, 2010 at 3:16 pm

        I do, whloeheartedly and without reservation or exception.

        By its very nature, for-profit insurance encourages providers to overcharge.

        Why would they incur the cost to investigate or challenge overcharging, if all they have to do is overcharge their customers to pay the costs, however unreasonable?

        If you consider this all down the chain, you realize that NO health-related service or product should be for profit.

        If there were NO profit in the system, then there wouldn’t even be a definition of fraud or abuse.

  3. JZ said, on March 8, 2010 at 5:49 pm

    B.W.
    Why do their motivations matter so much when it comes to effectiveness? What matters is if customers are being ripped off, and the profit margins don’t make it look that way (of course this could be because of control fraud and the principals taking money out before profits). Non profits are also vulnerable to control fraud, and should we ban people from working in them if they do it because we judge their motives to be self-serving?

    Heart transplants cost money no matter how desperate the need, and a non-profit and a for-profit both have to balance up to a 0% profit margin exactly the same or else they will cease to exist. This means there is a huge difference between 1% and 1000% margin. You can’t ignore that first 100%!

    100% -> 103.7% is a 3.7% difference in real health spending, its not an infinite difference as between 0%->3.7% that you appear to be imagining no matter the motive. If you have a system with a huge problem, you probably can’t squeeze it out of an area with such mediocre margins.

    • larrycheng said, on March 8, 2010 at 9:34 pm

      JZ – Coming from the tech world, I do feel like a 3.7% net margin is not a ton of room for error, though no miniscule either. I do wonder how these margins will change once healthcare reform is passed, if it is passed.

  4. Thomas said, on March 8, 2010 at 6:15 pm

    Maybe a better way would be to look at the health insurers by amount of their revenues that are paid directly back to health care providers versus retained for their own SG&A. If I were a health insurer today, I would be hiring as many administrators and building as many IT projects as possible to make my net profit look low so that when people wrote simple posts like this one, I would look good. But, hey, I’m sure that’s just me…

    • larrycheng said, on March 8, 2010 at 9:33 pm

      Thomas, there maybe some truth to this. Though these companies are all publicly traded, so they do answer to their shareholders and they have to compete with other publicly traded competitors.

  5. anon said, on March 8, 2010 at 6:29 pm

    But the healthcare providers are taking their fair share, its the pharmaceutical companies that are gouging prices in the USA to make up for price regulation in other countries. What is their net profit margin?

  6. HNReader said, on March 8, 2010 at 6:47 pm

    also, you can do alot to manipulate the balance sheet, which is what these companies do.

    what is profit

    revenue – expenses

    What can someone do to reduce profit margins to make a business look less profitable?

    whats a good way to lower profit margins?

    Pay huge bonuses, pay for extravagant outings as ‘expenses’ and keep operating costs high so you can say ‘hey look we are not profitable at all!’

    You can’t just take a cursory look at the balance sheet to really ascertain true profitability. Hence the dangers of trying to invest by doing things like looking at PE and picking the stocks w/ the lowest PEs.

    • larrycheng said, on March 8, 2010 at 9:35 pm

      Fair – similar to the point of Reader2Read – there are always different metrics to gauge a business by. I’m not sure net profit margin is misleading, but it is only one piece of the pie for sure.

  7. Someone said, on March 8, 2010 at 8:07 pm

    If I owned a business in an industry where I made 3% of $1,000,000, I would profit $30,000.

    If I owned a business in an industry where I made 3% of $1,000,000,000, I would profit $30,000,000.

    Now, if you actively work to inflate costs of services, but you still only collect 3% profit, you will gain at the expense of everyone else who has to pay in.

    Let’s inflate the costs of services, tell everyone they have to pay you more to cover it. At the same time tell them you are not raising your profit percentage, the increase is based on the costs of services only. This makes everyone think things are just inflating and your not the bad guy (posts like this).

    Now we are at $10,000,000,000 still taking only 3%, but we are now profiting $300,000,000.

    See how 3% can be misleading?

    • larrycheng said, on March 8, 2010 at 9:37 pm

      Someone – so is your premise that healthcare insurance companies are actively inflating their cost of services? Their services are provided by doctors, so are you saying that they’re paying doctors more than they should or they are paying doctors more than they have to?

      • Someone said, on March 8, 2010 at 10:50 pm

        It is all related. Doctors charge what they can, drug companies charge what they can, malpractice insurers charge what they can, etc. Not one of those I just mentioned are personally invested in providing the cheapest service they can. The money comes from the insurance company. The insurance companies get their money from all of us.

        What if you made it more difficult for doctors to get reimbursed? They have to hire more staff, thus charging more for their services. This is something the insurance companies can do.

        It is the gradual increases of all the pieces that make the insurance companies raise their rates. They may ‘pretend’ to fight it, but I would be in the back room laughing looking at my bank account.

  8. Peter said, on March 8, 2010 at 9:22 pm

    The best metric is not profit. We’re in capitalism, and health insurance is not a monopoly. Profit margins will be low. The best metric is efficiency. For each dollar I give to an insurance company, how much goes to treat people’s health problems? How much, in turn, goes to overhead?

    If we spend most of our money on actuaries, lawyers, and bureaucrats, the system is pretty broken. If we spend most of it on doctors, it works okay.

    • larrycheng said, on March 8, 2010 at 9:39 pm

      Peter – any idea what this efficiency metric looks like for the for profit health insurance sector v. something government-led like Medicare?

  9. Jeff said, on March 9, 2010 at 11:48 am

    Wow. Alot of people have swallowed the “Insurance Company Boogey-Man” kool-aid. Here is a good article that will give you a better idea of what drives health care costs:

    http://www.msnbc.msn.com/id/35726793/ns/business-your_retirement/

  10. Richard Jordan said, on March 9, 2010 at 4:44 pm

    I think this is somewhat misleading, to focus on declared profits from which taxes will be taken, and which are likely deliberately minimized.

    The egregious compensation practises rewarding insiders are another way huge $$ are taken off the table. We all saw the news of the huge spend on company perks and trips by insurance companies. That they try to keep down the profit margins at times of their unpopularity is a red herring.

  11. [...] Just How Profitable are Healthcare Insurers? « Thinking About Thinking [...]

  12. Hayden Iveson said, on March 20, 2010 at 2:00 pm

    Do you generally post information like this?

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  16. [...] on claims will cause premium increases.  Currently, insurance companies have a profit margin of 4% or less. Forcing them to pay out claims causes them to increase premiums to compensate.   It’s [...]

  17. Dems vs, Reps - Page 19 - PreCentral Forums said, on September 27, 2010 at 4:51 pm

    [...] Orion. I googled "health insurance companies profit margin" and took the first link: Just How Profitable are Healthcare Insurers? The meridian from that article is 3.7%. Not huge compared to most other industries. It really [...]

  18. Joe Votano said, on December 6, 2010 at 2:54 pm

    The net profits listed for profit medical insurers is quite misleading. The true profit is 20% for the average for-profit medical insurer. Yes, 80% is paid out and 20% kept. I think why these ridiculous low profit margins is due to fact that many medical insurers are doing multi-billion dollar buybacks of their stock, 100s of millions in executive compenstion, and spending billions to buy-out non-profit medical insurers, mainly what left of the Blues. Medicare on the other hand, spends 98% of every dollar of revenues on pay-outs- how them apples!!!

  19. [...] growth, prices are often excessive.  However, despite perceptions insurers are overly profitable—not an overly prevalent circumstance, many health economists’ suggest they have done little to pursue strategies to manage [...]

  20. Russ said, on August 11, 2011 at 2:04 pm

    OK . . . I’ve read the comments . . . the issue here is healthcare . . . not profits or non-profits. Ours is eroding because the insurance companies have such control over what they are willing to pay for an operation or stay in a hospital bed. Why? Because the cost of machines, pharmaceuticals, personnel, building insurance, doctor’s insurance, liability insurance, hospital beds, and on and on and on keep going up. Clean and sanitized hospitals are a thing of the past. Going into one could result in getting a serious, life ending infection. I know from personal experience. If you’re going to criticize the healthcare insurance companies, you’d better criticize anyone that makes, distributes, sells, repairs, finances, etc. equipment or services of any kind because profit is built into every one of them on down the line. You live in a profit driven market economy. Trying to socialize just a “bit” of it is comical. Welfare was tried in the ’6o’s and less than 20% of the budget actually made it into the recipients hands. Most of it got eaten up along the way by “administrative costs”. I don’t have any answers to the dilemma in which we’ve let ourselves fall. I do think that we need to stop being litigious and get back to dealing with our neighbors on a one to one basis instead of hiding behind “lawyers and authority figures”. We want things but we do not take the responsibility ourselves. We should. We are the government. Read the constitution if you think otherwise. Do your job. Don’t blame someone else. If you don’t want the insurance companies to make profit, stop paying your premiums and deal with the consequences. If everyone stopped paying premiums for a month they’d be bankrupt. Try it.

    • LibertarianRight said, on January 6, 2012 at 10:52 am

      Almost all of the rising costs are related to one of three things. First, much of it occurs because competition is not allowed by the government – insurance companies cannot sell the same plans across state lines, etc. Second, healthcare becomes more costly over time as it improves – new technologies like fMRI are very expensive, but most people want the best diagnostic and care they can get, which means they pay more (or their insurance does, as I think if people were actually paying for it themselves, they would be willing to accept a cheaper scan or “knockoff” drugs more often). Third, government subsidies and regulation create a situation where organizations just charge more and more, because the government will pretty much pay whatever they need to. The same effect occurs with education, where colleges raise tuition constantly, all the while knowing that government will increase subsidies to protect “higher education for the poor”. Over the entire economy, regulation requires $1.75T to be wasted in compliance costs – enough to hire roughly 25% of the entire labor force (over twice the current unemployment level). The healthcare industry is one of the highest regulated industries in the US currently. Do the math. Burdensome, unconstitutional, federal regulations also increase costs significantly, for all insurance companies. Obamacare is only likely to worsen the issue.

      The laws of supply and demand cannot be ignored here. Not everyone can be helped – at least not cheaply. If we really want to drive down the cost of healthcare, but still retain the benefits of having a free market, we must actually have a free market. The problem is not that government is not involved, but that it is. Far too much. Central planning didn’t work for the Soviet Union. It didn’t work for Red China. (It certainly isn’t working with our central banking system.) Why would we try it here with something as important as our healthcare?

  21. Bill Yeagley said, on June 6, 2012 at 12:46 pm

    I find your conclusions interesting, is the net margin calculated following the $1.6 B in total compensation to the CEO of United Healthcare? If we were to check the holding/parent company financial statements wouldn’t the total return, including the return from the commercial office buildings they own or whatever they now invest in since 2008, be closer to 23%? Pardon my skepticism but the 20+ Million in salaries paid the average health insurance CEO seems a bit steep when the mission is to keep the public healthy. How are they doing with that?

  22. Julia said, on June 25, 2012 at 12:15 pm

    The numbers are bogus, based on how effectively they can hide their profits due to corporate loopholes. For example they get to claim all infrastructure improvements first and “losses.” Plus these numbers don’t take into account Blue Cross/Blue Shield which is a series of “private” companies that are gauging people to death. Also the math of percentages hides reality. 2% of $100 is $2 but 2% of a billion…well you get the point. Finally this research is bogus because if you click through the industry numbers are significantly higher than these examples. Add in the millions to corporate execs and the whole house of cards falls down. Another insurance sector apologist.

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