Are Health Insurers Worth Bashing?

This guest post was contributed by Andrzej Kuhl, a colleague of mine from a former life. Andrzej is a management consultant based in Montclair, New Jersey.  His company, Kuhl Solutions, helps improve the efficiency and effectiveness of operations in financial sector companies.

I am getting thoroughly frustrated with a facet of the health care debate – the singular focus on health insurers, with total disregard of other contributors to health care costs.  Yes, I am in total agreement with the concept of providing health insurance to folks who currently cannot afford it, or who do not have access at any cost (because of pre-existing conditions).  I also believe that the rate of increase of health spending needs to be significantly reduced.  But, I do not believe that we can achieve any meaningful health spending reduction just by bashing or financially squeezing the health insurance companies.

Before I go any further, let me state that I do not own stocks or bonds issued by any company in health care, health insurance, or related industry segments.  I have no health insurance clients.  And none of my relatives or friends work for a health insurer.

Lately, it has become quite fashionable to cite egregious moves of various insurers and imply that if such moves were eliminated, the cost of health insurance (perhaps even health care) would be reduced.  President Obama (and others) frequently cites Anthem’s 25% rate increase in California.  Kathleen Sebelius, the secretary of health and human services, according to a 3/9/10 NYT article (p. A18) has called health insurers’ profits “wildly excessive“.  The same NYT article quotes Senator Diane Feinstein: “I believe, fundamentally, that all medical insurance should be not-for-profit.”  Also in the Times, Robert B. Reich, a former labor secretary and a Professor of Public Policy at the University of California at Berkeley, writes in a 2/24/10 article, “. . . because big health insurers are making boatloads of money. America’s five largest health insurers made a total profit of $12.2 billion last year [2009].”

So, let’s try to answer two questions:

1.  What do we achieve by trimming “wildly excessive” profits of health insurers?

2.  Are these profits “wildly excessive,” when compared to other industry segments?

It was actually Professor Reich’s article that initially sent me looking for information, as his billions of dollars of health insurance profits were a meaningless factoid unless one placed them in the context of the actual revenues of the five top insurers.  In order to have a solid foundation of comparative data, I reached for the 2009 Fortune 500 rankings (based on 2008 financials), easily accessible on the CNN web site.  The Fortune numbers are somewhat different from Professor Reich’s data, as they represent prior year results, but one also gets an unbiased comparison with other industries.

In 2008, the top 10 health insurers combined had $264 billion in revenue and profits of $8 billion.  A little bit of arithmetic shows that the combined profit margin for this group was 3.1%.  The highest profitability among the top 10 was reported by Aetna: 4.5%.

Thus, even if we regulate all health insurers to eliminate all their profits, as Senator Feinstein would have it, we can only reduce health insurance spending by 3.1%.  So much for the boatloads of savings that Professor Reich talks about – the impact on our health insurance costs would be minimal.

Now, one might say that turning the health insurers into true non-profits would also free up the sums currently spent on sales and marketing.  While this is mostly true, the sums saved still do not present a panacea for rising health care costs.  A spot check of annual reports shows that the cost of sales for top 10 insurers is about 3-4%.

So, let’s move to the second question.  We cannot make a dent in health insurance spending, but perhaps it’s worth bashing health insurers because their 3.1% profits are obscenely high when compared to other industries.

Well, it is not quite so.  The same source shows that top 10 pharmaceutical companies reported 18.4% profits in 2008 ($49 billion profit on $269 billion revenue).  Interestingly, the top pharmaceutical company – Johnson & Johnson – earned ($13 billion) more than all top 10 health insurers taken together.  Other “pharma” players were not far behind.  Both #2 (Pfizer) and #4 (Merck) earned $8 billion each, or as much as the 10 top health insurers taken together.  The highest profit was 37.7%, reported by Gilead Sciences.

Similarly, the top 10 companies in the “medical products and equipment” segment had 10% profit ($6 billion profit on $64 billion revenue).  It actually would have been closer to 15%, if not for the disastrous year experienced by the #3 player, Boston Scientific.

Once you internalize these numbers, it becomes clear that any meaningful reduction of health insurance costs can only be achieved by reducing the underlying health care cost structure.  We cannot hold health insurance rates flat if we allow pharmaceutical companies to average 18.4% profits and to grow their revenues.  That would be akin to freezing the price of cars while allowing price increases for steel, rubber, etc.

As I was thinking about what health insurance profitability would not be deemed “wildly excessive,” I also looked at other areas of the economy where we spend significant amounts of money without complaining too loudly.  Interestingly, the top 10 Computer Software companies reported 23.6% profits on average.  The top 10 in Household and Personal Products (ranging from hammers and batteries to toothpaste and lipsticks) averaged 11.2%. Even the regulated Gas & Electric Utilities earned10.3%.

So, the 3.1% profitability that health insurers reported in 2008 pales in comparison with other industries and, even if totally eliminated, will not make a significant dent in our spending.  Any meaningful cost reduction will require a disciplined approach to modify the way we consume and price health services, ranging from doctor and hospital fees to pricing of medications, equipment, and supplies.

75 responses to “Are Health Insurers Worth Bashing?

  1. “Once you internalize these numbers, it becomes clear that any meaningful reduction of health insurance costs can only be achieved by reducing the underlying health care cost structure. We cannot hold health insurance rates flat if we allow pharmaceutical companies to average 18.4% profits and to grow their revenues.”

    Absolutely. Unfortunately, Big Pharma has been a political darling in the U. S. for a long, long time.

    At the same time, the U. S. health insurance setup sucks big time. The question is not so much cost, but the relative impotence of the insured. Who, aside from insurance executives, approves of denying affordable insurance to victims of domestic abuse?

  2. Michael Wasserman

    The pertinent metric is not reported insurance company “profit” (which, of course, excludes such expenses as executive compensation), but the margin between premiums collected and “medical losses” — the industry term for money actually spent on providing health care. That data is pointedly missing in the diatribe above.

  3. Agoraphobic Kleptomaniac

    Attacking insurers has little to do with their profits. Yes, you can grab grandstanding quotes about healthcare profits in the media, but any wonk isn’t just focusing on only profits for those companies. Other items that must be addressed by the health care legislation WRT insurers.

    -Legal Monopolies (I think this has been remidied in a separate bill already)

    -Abnormally high overhead costs (7% according to Keiser, while Medicare has less than 2%, which is more in line with international rates)

    -Veiled costs to customers (by cost shifting and by playing the Payment Game that every doctors office has to play by increasing Billed costs to get insurance companies to pay a fair share, which increases costs to uninsured people, since the “insurance price” is artificially inflated)

    -payment for services not rendered. When you waste money by handing it over to an insurance company which then tries as hard as it can to find a reason NOT to pay your bill (which still hasn’t been remadied in the bill, the “fraud” loophole still exists for recissions, last time i checked) you’re taking money out of the system, and then when a person’s insurance gets denied, that person still has to spend their own money, all while losing their invested cash in the insurance (or taxpayer’s/hospitals money).

  4. I am getting thoroughly frustrated with a facet of the health care debate – the singular focus on health insurers

    I’m getting thoroughly frustrated with the very existence of these purely parasitic criminal rackets.

    And with anyone who would shill for their existence.

  5. & the incentive for insurance companies to bargain the prices down is…?

    I believe the proper word is “disincentive.” Insurance companies make a percentage of the money they pay out.

  6. Maybe we as a society are fat, lazy, drink too much, and smoke too much. Would we need as much insurance if we actually took care of ourselves? We will always be spending too much on health care in this country if we don’t address the root cause.

  7. the rest of the developed world delivers perfectly decent universal coverage, using several different models, at costs far less than ours. can anyone be naieve enough to believe it is pure coincidence that only the USA has these rapacious corporations running the system? regardless of the detailed accounting, they have GOT to be the problem.

  8. When companies make things, they add value to society. There is a greater risk taken by those companies: risk of products failing in market. Intel is expected to have greater operating income than Safeway grocery stores. You are either dishonest or disillusioned when you compare a medical equipment company’s operating income with an Insurance company’s.

  9. Rufus T. Harlemberry

    Not at all. Their profit is in the difference between premiums collected and payouts made plus overhead. They have an incentive to negotiate lower payouts.

  10. Poor health is not really the root cause, it’s free to die. Poor health in the presence of expensive treatments for poor health costs money. Neither is it clear–with the advent of cosmetic surgery, hormone replacement, etc.–that healthy people would spend nothing on health care. As long as “health” is a consumer good, there will be those who want to purchase it.

    The fundamental cost increases in health care comes from:

    1. The increased number and quality of medical procedures.
    2. The rate at which innovation in medical procedures outstrips the increase in standard-of-living.
    3. The basic animal drive to live longer and better.

  11. Ultimately the cost will only come down if hospitals, nursing homes, doctors, drug and medical device companies charge less.

    Or we could use these services less.

    Why do we pick on big pharma all the time when the real costs are in all these other things? If you are on Lipitor, you should be ashamed of yourself for wasting money. There are plenty of generic statins on the market.

    Stop taking all these drugs!

    http://en.wikipedia.org/wiki/List_of_bestselling_drugs

    “With the exception of prescription drugs, spending for most other health care goods and services grew at about the same rate as in 2006, or faster. And some of those other categories are more significant in the overall picture. Prescription drugs account for 10 percent of all health spending, much less than either hospitals (31 percent of the total) or doctors (18 percent).”

    http://www.nytimes.com/2009/01/06/us/06healthcare.html

    Doctors and hospitals need to be cut too.

  12. It’s not free to die. We don’t even have a right to die in the USA.

  13. Count Ziggenpuss

    1) “But, I do not believe that we can achieve any meaningful health spending reduction just by bashing or financially squeezing the health insurance companies.”

    Ummmmmm…. so mandating everyone to buy insurance from health insurance companies is your idea of “financially squeezing” them? Oh, Kay.

    2) “Lately, it has become quite fashionable to cite egregious moves of various insurers and imply that if such moves were eliminated, the cost of health insurance (perhaps even health care) would be reduced.”

    Well, actually, yes…….. and your own partially flawed analysis says so here: “Thus, even if we regulate all health insurers to eliminate all their profits, as Senator Feinstein would have it, we can only REDUCE health insurance spending by 3.1%.” Your flawed analysis assumes that all expenses – eg, compensation, lobbying, administrative – would remain the same after reform, or with a public option or single-payer. Several analyses have been done on this, all suggesting savings anywhere from 10% to more than 30%. And bashing the insurance companies is “quite fashionable” because they have been the most vocal combatants of health care reform for decades…… duh!

    3) “Any meaningful cost reduction will require a disciplined approach to modify the way we consume and price health services, ranging from doctor and hospital fees to pricing of medications, equipment, and supplies.”

    Thanks, Dr Obvious……. spend 30 seconds on http://www.kff.org and you’ll learn that each bill, particularly Obama’s, does quite a bit of this.

    James – From now on, please limit guest posts to those who have something at least mildly intelligent to say…… I really wish I had the few minutes I spent reading this post back.

  14. Mr. Kuhl overlooks something important. Regardless of whether or not health insurers are being rightfully demonized in the media, they are the necessary locus for policy pressure. The profits insurers take may or may not be reprehensible, but the service they provide is one of resource allocation and rationing. Controlling medical costs is a matter of squeezing those services to induce insurers to squeeze providers, pharmaceutical companies, and other entities to whom they relinquish capital.
    Other Western governments have chosen to eliminate segments of the private sector in favor of central public protocols for medical resource allocation and rationing. Here, we’re in the midst of making a bargain with the private insurance companies. They’ll continue to exist, so long as they improve the efficacy with which they serve the public interest.
    In other words, the demonizing rhetoric may not be factually accurate, but it serves the necessary purpose.

  15. I’m a little surprised to see this on “Baselinescenario”. It’s normally good and healthy to the debate to get different viewpoints. BUT, this is like the recent Felix Salmon-like rush to defend to the poor CDS dealer/traders, I don’t know whether to go into shock, or just laugh. Weren’t there some people in California whose rates went up 39%, not 25%?? http://www.sacbee.com/2010/03/05/2584092/obama-presses-health-insurers.html

    My major question to Mr. Kuhl would be, if insurance companies costs are so innocent, would it not help insurance companies cause to make their costs MORE TRANSPARENT??? Would Mr. Kuhl have us believe that Anthem Blue Cross cost structure is some “industry secret”??? It’s laughable. Then why do insurance companies insist on the SECRECY of their costs!?!?!?!! Why the constant battle to hide details. If they want to be treated “fairly”, isn’t the onus on the health insurance companies to provide the details to the public and specifically their policyholders???

  16. Apparently, few on here understand how insurance companies make their money. Ever hear of float? Warren Buffett understands it and even though Berkshire makes little in the way of underwriting profit [in fact few insurance companies make any underwriting profit] he has $62B in float to invest and make money with. If he can get a 10% return on the float that is $6.2B year in profits! However, in 2008 the investment returns were a little…shall we say….squeezed. So you might want to look at different years to adjudicate the profitability of insurers!

  17. Notice the fact if you want to know the justification for rate increases, there are only 2 places in the ENTIRE state of California to find the information, Los Angeles and San Francisco. You CANNOT find the information online. And in the 3 years Steve Poizner has been Insurance Commissioner of California, he has done NOTHING to get that information available online. I copied and pasted the following word for word from Bobby Calvan’s story in The Sacramento Bee:

    Anthem Blue Cross recently sent letters in the mail notifying its subscribers that it planned to raise rates by as much as 39 percent.

    On Thursday, The Bee contacted the office of state Insurance Commissioner and GOP gubernatorial candidate Steve Poizner to ask whether he thinks rate increases should be posted online. Poizner spokesman Darrel Ng responded with an e-mail saying public access to that information already exists in California, albeit not online.

    In California, the only venues for the public to view rate filings are in San Francisco and Los Angeles, where the state Department of Insurance allows inspection of the documents.

    “The fact that you have to schlep to San Francisco to see these filings is not very transparent,” said Anthony Wright, executive director of Health Access California, among those who have joined the call for greater transparency in how health insurance rates are set.

    “Putting them online is a good step in California, where we have very few regulations regarding health insurance rates,” Wright said.

    “I think people want to know why” rates are increasing, he said. “It informs consumers as well as policymakers and others who watch the industry. How can they raise rates without justification or even without explanation?”

  18. After a 4 year stint in the industry, it was clear to me that without the profit motive, managing the ‘risk pool’ could be handled by any junior accountant capable of the most basic mathematics.

    Once you layer on the requirement for profit, the necessity of creating an infinite series of ‘rationale’ for denying coverage becomes the only way to manage ‘risk’.

    Or to put it another way, managing ‘risk’ involves paying our insurers to deny us coverage whenever it threatens the profit margins they set during the underwriting process (regardless of their competence).

    That’s the same sort of ‘value-added’ you see with financial ‘innovation’.

    The term ‘parasitic’ may be too soft…

  19. Pay doctors less, especially specialists.

    And require med schools to lower their tuition.

  20. Notice that CEO salaries, nor anyone elses are not considered “profits”

    So consider the Insurance companies revenue. Is that the total they take in in premiums? If so, then you would expect them only to have a very low “profit” margin. But if you look at The total money they take in minus the total money they put out, it’s often less then 85% The remaining 15 % they split up between their employees and their shareholders.

    That’s the medical loss ratio, and the new legislation will make 85% a minimum. But that’s still a lot for the insurance companies. Medicare’s medical loss ratio is only 3%, and they pay out 97%. Much better deal.

    So the money the insurance companies spend on advertising, denying claims, etc is a huge dead weight on the economy.

    But it’s absolutely true that Americans pay way to much for the underlying services as well. But insurance companies are *taking* far more then 3%. The 3% is just what they’re giving back to their shareholders.

  21. mondo pinion

    Somebody help me out here . . Couldn’t the problem with the insurance parasites be solved by just lowering the age at which Medicare kicks in? I refer to the new and improved Medicare when/if Obama gets his reform. Lower the minimum age in large increments until everyone is included — wouldn’t you then have a system similar to health care in Europe and Canada ? Might have to add a few clauses for childbirth and neonatal stuff, I suppose . .

  22. I agree with the author that the pricing of health care delivery does not have as its major profit margin, the slice of profit the insurers get. But this is politics and they do engage is some reprehensible tricks even though they don’t make a very big profit margin. The visibility of those tricks are used to sell health care reform so they are reaping what they sow. The federal government needs to become the big volume customer to get the discounts that are given to Microsoft, Cisco, IBM, Bank of America etc. Congress will never let that happen(yes both Democrats and Republicans live off the funds provided by the health care lobbyists.) In a true free market the biggest customer gets the biggest discounts but of course Congress has passed a law preventing Medicare from negotiating drug prices though I am sure Tri-care, Federal Blue Cross, and the VA can negotiate their prices.

  23. The continued reference to “small” profit margins by health insurance companies drives me crazy. The margins are always expressed as a percentage of premiums or gross revenue. It as always “overlooked” that approximately 80% of health insurance revenue is targeted for health care reimbursement. Only approx. 15-20% of revenue is actual reimbursement/profit for services performed by the insurer (risk charges, general overhead, etc.). Consequently, insurance companies are making a profit of 3.1% on real revenue for services of 15-20% of premium, equal to an actual profit margin of 15-20%. And this profit margin does not include investment income from pre-payment of premium combined with 2-3 months claims payment lag. Insurance company-provided profit margins are misleading and self-serving. It’s amazing they continue to get away with it.

  24. With respect to health insurance, the government wants to use the “Ma Bell” or “telephone company” approach, treating insurance companies like public utilities and regulating the rate of return, gradually pressing it downwards. Perhaps you remember how “the telephone company” was 40 or 50 years ago — any color of telephone you wanted, as long as you wanted black.

  25. Thank you – I think everyone is going to have to take a haircut here. There are a lot of doctors and hospital administrators that make too much too.

    That said, insurance companies do suck and the answer is to not stop holding them accountable as well, just add more to the same pool being targeted.

  26. You’re comparing apples to oranges. Outside of the use of computerized records, like financial instruments, there isn’t much room for innovation. We don’t need insurance companies to come with new and innovative ways to provide coverage – we just need coverage.

  27. Could you explain this further? I’d like to understand more…

  28. Mr. Kuhl wrote:

    “So, the 3.1% profitability that health insurers reported in 2008 pales in comparison with other industries and, even if totally eliminated, will not make a significant dent in our spending.”

    Wikipedia wrote:

    “Despite the fact that not all citizens are covered, the United States has the third highest public healthcare expenditure per capita. A 2001 study in five states found that Medical debt contributed to 62% of all personal bankruptcies.

    According to the Institute of Medicine of the National Academy of Sciences, the United States is the “only wealthy, industrialized nation that does not ensure that all citizens have coverage” (i.e. some kind of insurance). The same Institute of Medicine report notes that “Lack of health insurance causes roughly 18,000 unnecessary deaths every year in the United States.” …..while a 2009 Harvard study published in the American Journal of Public Health found a much higher figure of more than 44,800 excess deaths annually in the United States due to Americans lacking health insurance.

    An oft-cited study by Harvard Medical School and the Canadian Institute for Health Information determined that some 31% of U.S. health care dollars, or more than $1,000 per person per year, went to health care administrative costs, nearly double the administrative overhead in Canada, on a percentage basis.”

    http://en.wikipedia.org/wiki/Health_care_in_the_United_States

  29. the profit % is meaningless. The real problem is a monopolistic industry that treats its customers like crap(not different than a lot of american industries) but in this case it is lives on the line. they have become particularly good at selling policies that do not cover what people need and kicking people off policies that when they need care. To funnel health care dollars through these companies is a crime unto itself.

  30. You were not supposed to notice that Mr. Wasserman. Try to learn the proper role of dolt and blend in with the crowd. Executive pay is something near and dear to the hearts of those in the “consultant” field.

  31. Then tell Pharma to stop advertising 34/7!(for effect)

  32. OK…when health insurance companies develop pricing for a product (premium), they first project anticipated claims volume. Reimbursement for submitted claims by covered insureds usually comprises 80-85% of the premium paid by groups & individuals to the insurance company. The remaining 15-20% is payment to the insurance company for the services the insurer provides (underwriting, collection of premium, claims administration, etc.).

    When health insurance companies compute their profit margin, they include the entire premium, including the 80-85% which is really just a pass-through of claims reimbursements, in the denominator. This significantly understates the profit percentage. A less misleading measure would be to measure profitability as a percentage of monies received for actual administrative/UW functions. This would create a more accurate picture of the 15-20% margin companies receive for the services they provide.

    Insurance companies also require pre-payment of premium. There is also a 2-3 month “lag” between the date a service is received from a provider of care and the date the insurance company issues the reimbursement. These “lags” are significant and allow the insurance company to generate investment income on premiums received prior to actual reimbursement.

    Hope that helps.

  33. How are doctors going to get their free trips to Maui and Florida for the facade of a medical conference or symposium if they start doling out generic pills??? Have you lost your mind or something???

    You know that guy who gets in IMMEDIATELY to see your doctor when he shows up 1 hour after you’ve been waiting?? That’s what they call the “drug rep”. He always comes with lots of goodies.

  34. Well we could all try to exercise a little self-control. We have a choice, no?

  35. Helps a lot – thank you very much!

  36. That would imply that the problem is not that the industry isn’t profitable, but rather that the profit is getting sucked up in unnecessary administrative function.

    In short, the insurance companies are low profit from being incompetent, not from being low margin.

  37. Another big thing that gets left out is that the vast majority of claims come from a very small portion of the population. (Keith Olbermann’s father being an example. Terry Schiavo being another.)

    No one has really addressed that large expenditure, though understandable due to it’s nature.

    Simple, basic care services sometimes subsidize the others.

  38. Profits isn’t the main number to look at. It’s the total overhead. Advertising, administration, cost shifting etc., etc. Medicare runs w/ an administrative overhead of 2 or 3 pct; private insurance companies run much higher, maybe 5 or 10 times higher.

    Also, for profit insurers don’t have any real incentive to curtail bogus medical procedures, they just up the premiums to cover the added expense.

  39. RA wrote:

    “Profit isn’t the main number to look at.”

    Think outside the box.

  40. “Profit” is not the main thing to look at – at least not on a margin or absolute basis. Whether the insurance industry has an abnormal return on capital is all you need to know. Not sure what those numbers look like.

    The key thing to realize is that we have private insurers. We expect them to make money. We invest in their stocks, and fiance their borrowing. To then turn around and throw stones at them for trying as best as they can to capitalize on an opportunity is highly hypocritical. Why would anyone invest a dime of capital in a business that is not expected to make any money? So if everyone had it there way, the private insurers would go out of business as capital fled the industry. This would be a good thing from my perspective – but its simply not the system we have set up.

  41. I have to say, I completely agree that health insurance companies are not the big profit earners they are made out to be. But, lets think about the way that they make those profits. They make those profits by denying payment for care, kicking individuals and families off their plan when they need it the most, and so on. Health Care Reform is not just because insurance companies are making a profit. It is needed to provided people with insurance, to stop the horrible practices, and to create competition. Now this HCR bill could have done a lot more in terms on Pharm cost and so on. But this is a step in the right direction.

    I guess I agree with what you said in your article. But, I think you are looking at it the wrong way.

    My take on it is insurance companies are there to proved people the money needed to get treatment. And we have seen it over and over again when people who need their insurance the most are denied coverage. They shouldn’t be worried about making a profit. Which is why we need either a public option or medicare for all. Need to take the MOTIVE of profit. It is not about the number it is about the MOTIVE behind the number.

  42. Well said. Well said. Exactly why we need a strong public option.

  43. Darwin would disagree.

  44. Jason wrote:

    “I have to say, I completely agree that health insurance companies are not the big profit earners they are made out to be.”

    Wikipedia wrote:

    “According to a study by a pro-health reform group published February 11, the nation’s largest five health insurance companies posted a 56 percent gain in 2009 profits over 2008. The insurers including Wellpoint, UnitedHealth, Cigna, Aetna and Humana, which cover the majority of Americans with insurance.

    “Insurance companies have high administrative costs. Private health insurers are a significant portion of the U.S. economy directly employing (in 2004) almost 470,000 people at an average salary of $61,409.

    Health insurance companies are not actually providing traditional insurance, which involves the pooling of risk, because the vast majority of purchasers actually do face the harms that they are “insuring” against. Instead, as Edward Beiser and Jacob Appel have separately argued, health insurers are better thought of as low-risk money managers who pocket the interest on what are really long-term healthcare savings accounts.”

    http://en.wikipedia.org/wiki/Health_insurance_in_the_United_States

  45. Lower payouts on more transactions, though.

  46. February 21, 2010 (AP)

    “The CEO of WellPoint Inc., the nation’s largest health insurer, is being called before Congress this week to defend planned rate hikes of as much as 39 percent for some customers even as the company made billions last year.”

    http://abcnews.go.com/Business/wireStory?id=9902035

  47. I agree that simply looking at health insurers is not the answer. Although the Netherlands operates solely through private health insurers and does a credible job of health care while including access for 100% of its population. No insurer can turn anyone down, regardless of age or health, and the government tells them how much to charge, and how much they must pay to providers, and tells providers how much they must accept from insurers and tells patients how much treatment they may have, along with a host of other things which all lead to improved outcomes.

    The insurers are not what is wrong with our system, it is a failure to efficiently allocate resources and do the things it takes to produce outcomes. It is a very complex system. Just as an example, for a pharmaceutical manufacturer to bring a drug to market, there has generally been an investment of millions of dollars before the first pill is manufactured to fill a prescription. In order to recoup these costs, the producers charge a premium price. The reason for the excessive development costs is the inefficient system regulated by the FDA among other reasons, but significant. The next problem is, that Americans seem to feel that there should be a drug to cure everything, and doctors write prescriptions like crazy for this reason, as well as because they are paid by and influenced by the drug companies to do so.

    Curious: I am a man of 64. I have no health insurance, and can’t afford it. I haven’t seen a doctor for nearly five years, and, aside from ridiculously arthritic knees caused by lots of sports injuries from football, basketball, tennis, soccer, and baseball, which I treat with ibuprofin successfully, I am otherwise in decent health. I used to get bronchitis once or twice a year, and when I did, I took antibiotics to get over it. I then realized that this was a mistake, and that all these drugs were doing was standing in for my immune system, and not forcing it to work for itself. I stopped taking antibiotics 15 years ago and have had mild bronchites TWICE since I did. On my last visit to a doctor, he told me that I had congestion in my chest and should take antibiotics to keep it from turning to pneumonia. I told him no, and got over it in a couple of days.

    We need to look at rational solutions for our health care problem. The present bill is absurd, and will kick the problem down the road without solving it. We do need to start over, but not for the reasons offered by Republicans. We need to look to the medical community for solutions. Max Baucus would not even allow single payer advocates in the room during his hearings, and recently admitted that this was because, although he favored it, it would be a waste of time discussing something that wouldn’t pass if offered to a vote. Interesting that PHIP and the AMA voted a majority in favor of single payer (Medicare for all), as well as more than 60% of the public, and at the time of the hearings.

  48. Once again, health insurers don’t need to make an underwriting profit, to make a healthy return. They have a float [the premiums paid in advance of it being paid out] that they can invest and make profits from. The fact that they have such a large difference in premiums to paid medical costs is only an example of greed. If they paid out every cent in premiums, they could still produce a healthy return for investors, just like Warren Buffett does [even though they are unlikely to replicate his 20%+ return].

    The second point is that these insurers have off-shore accounts where they stuff profit. I know this because a friend used to work for a large HMO and he is very aware of this practice. I am not anti-business nor a conspiracy guy, but there is doubt in my mind that these accounts siphon off profit. How they keep it off the books is above my pay grade.

  49. Sorry, the next to last sentence should read, “I am nor anti-business nor a conspiracy guy, but there is NO doubt in my mind these accounts siphon off profit.

  50. Both Switzerland and Taiwan, which reorganized their countries’ health care systems in the ’90s, looked at the U.S. system along with other countries’ before deciding on the best health care system for themselves. Both of them decided to take the profits out of the insurance industry (at least for basic plans that would cover everyone), relegating insurance companies to simple claims payers. Further, these countries set up a regulatory body to determine rates for what doctors and hospitals could charge for each medical procedure and drug companies for each drug that was prescribed.

    Until the U.S. is ready to take the profit out of basic insurance, set rates for providers, cap drug and medical device costs and make it clear to doctors and medical technicians that they will have to settle for lower salaries – especially specialists – our health care system will never be financially supportable.

    But these are steps our congressional representatives will never take as long as their continued employment is dependent upon campaign contributions from the very industries they should be regulating. We need public campaign financing.

  51. Kuhl writes: “But, I do not believe that we can achieve any meaningful health spending reduction just by bashing or financially squeezing the health insurance companies.”

    Neither does anybody else. What we ought to do is abolish them. They profit from killing people. That’s immoral.

  52. That is exactly the most glaring point. Just take a look at the overhead and administrative costs of our privately run system versus any publicly run system in Europe or North America. I’m surprised they would run such a garbage piece on an otherwise respectable blog.

  53. This expenditure represents about 75% of medical costs. In essence we spend 3/4 of our health care dollars on the last one month of life.

  54. This is a terrible post. As others have said, it completely ignores the fact that the immense sums of money being wasted by insurance companies are not manifested as profits, but are instead directed towards insiders or wasted in non-productive attempts to deny care.

    They are a massive drain on the system.

    If you accept the notion that we should guarantee universal coverage, then you are accepting the idea that we will not discriminate between sick people and healthy people.

    And that is the only reason that health insurance companies exist.

  55. Good to see you here. I had a feeling you would not let this slide by.

  56. To argue that profits (measured as a percentage of revenue) isn’t the right yardstick to use for insurance companies is ill conceived. By your arguing, Dell’s profits shouldn’t be measured as a percentage of their revenue because a significant portion of the money consumers pay to Dell is simply “pass[ed]-through” to hardware suppliers. In fact, the same is true for just about every industry where consumers buy something!

    You can’t change the yardstick between industries then expect to be able to compare industries.

  57. 70% of the US economy is based on consumer spending. The heath care system makes up 16%. What is the 14% left over about?

  58. It’s not just Mike Taibbi identiftying a certain TBTF bank as a Vampire Squid. The whole US political-economy system feels like a Vampire Squid ..

  59. I think I heard on the radio today that the health system is 16% of GDP. That is the problem. Any solution that does not reduce it to 10% of GDP is not a long term solution. We have too much health care and to much profit in health care. If it were less profitable, there would be less of it. Individuals might actually begin to choose to be healthy. Docs might seek to make individuals healthy instead of treating symptoms. I personally have seen incredible things from changing diet and using eastern medicine. As a lender, I see huge profits throughout the system. Huge. Huge. Huge. The industry is just like finance, it needs to be cut down to size. That means some people’s “special interests” need to be made secondary to society. Insurance is one piece, only one.

  60. “On March 1, 2010, billionaire Warren Buffett (who is considered one of the world’s most savvy investors [52]) said that the high costs paid by U.S. companies for their employees’ health care put them at a competitive disadvantage.

    He compared the roughly 17% of GDP spent by the U.S. on health care with the 9% of GDP spent by much of the rest of the world, noted that the U.S. has fewer doctors and nurses per person, and said, “[t]hat kind of a cost, compared with the rest of the world, is like a tapeworm eating at our economic body.”[53]”

    http://en.wikipedia.org/wiki/Health_care_in_the_United_States

  61. There is another market based approach to health provision. It is guaranteed to reduce the cost of health care by making it a truly competitive market place. It will remove the “middle men” in the health system that increase the costs and it will provide the true health providers with a more satisfying and fulfilling role as they can concentrate on providing good health care without the burden of excessive form filling and so called processes to make them accountable.

    The overall approach is to, each year, give every individual the right to a fixed amount of interest free loan to cover their likely health costs. Loan rights accumulate if you do not use them. They can be passed on to dependants in the event of your death.

    http://cscoxk.wordpress.com/2009/08/23/financing-a-nations-health/

  62. Agoraphobic,
    Comparing private insurer metrics to those of Medicare is totally irrelevant considering hospitals lose money on most Medicare patients and subsize it by charging private insurers a higher amount.

  63. Tippy,
    I believe most of healthcare spend is included as part of consumer spending.

  64. You’re kidding, right? Dell actually purchases hardware from suppliers to be used in its product. The hardware is an expense to the development of the product. Health insurance reimbursement to health care providers is nothing of the kind. Insurers merely take money from insureds for transferral to providers. The insurer “product” is the service it provides. Its product doesn’t include the service provided by the doctor, hospital, etc. Using your reasoning, credit card companies could include customer purchase amounts as revenue to understate profitability margins.

  65. Mr. Kuhl wrote

    “Are Health Insurers Worth Bashing?”

    Insurer targeted HIV patients to drop coverage

    March 17, 2010 – Reuters

    http://www.reuters.com/article/idUSTRE62G2DO20100317

  66. Read TR Reid’s book ‘The Healing of America”

    Every other developed country has some sort of universal care. It is interesting to see what they have in common. They ALL have government heavily involved in the setting of prices. Oops for doctors, hospitals, insurance companies etc. Oops for lawyers.

    Only the US has for profit health insurance companies.

    Canada is a case in point which illustrates a social phenomenon that does not exist in the US- namely that when it comes to access to health care, citizens are created equally. The Canadians believe that health care is a civil right and that no person (even if he is rich) goes to the head of the line. The rich can always come to the US to get fast high quality care. Some do but reports of this activity are probably overstated.

  67. “Police say that Ontario health cards sell for about $1000 in Toronto’s black market… ” (1996)

    http://tinyurl.com/y9ulzhb

  68. Insurance companies also require pre-payment of premium. There is also a 2-3 month “lag” between the date a service is received from a provider of care and the date the insurance company issues the reimbursement. These “lags” are significant and allow the insurance company to generate investment income on premiums received prior to actual reimbursement.

    As a taxpayer I’m outraged that Medicare doesn’t similarly slow-pay doctors to generate income from the float. Medicare averages 14 days to reimburse doctors. Of course, we’re lucky we don’t live in Taiwan, their single payer system has every citizen enrolled in an electronic medical record system. By integrating online billing with its EMR system, it has payments out to doctors in a week– all that investment income wasted!

    OK, /snark. Honestly, the health insurance industry is a parasite. Ethically they’re somewhere between sex tourism operators and the Apartheid-era South African government. Their business model simply put, is 1. making money by denying medical care to the sick and dying, and when they do deign to approve care, 2. slow paying on their obligations (at previously negotiated rates) to reimburse providers.

    Last week a friend of mine in the AR factoring business told me about health insurer’s latest reimbursement innovation. They have consultants call medical offices owed money for services rendered and give them a choice– accept a marked down reimbursement amount within 60 days; or insist on full payment and wait an indeterminate time to see a check (I can’t remember if they told my friend 6 months or if that was his surmise).

  69. You are correct that it is underlying health care costs that drive the macro economics of the situation. However, the lack of market forces would not reward a player who reduced his underlying per unit costs and the not being rewarded with more volume would not allow greater scale and spreading of fixed costs. Government has so tinkered with the system and become the perpetrator of destruction that health care is a brown-field that would have to go through remediation before society can get what it wants.

    Where I think you are off base is that health insurance is a tiered system that lays off risk to a variety of parties. It is the reinsurers who profit immensely and that is why Warren Buffet has systematically acquired reinsurers over the past few years.

    Nothing short of moving to a market based risk hedging approach using health futures contracts will get the job done. Furthermore, demand in terms of individuals, small businesses and suppliers in terms of physicians must be aggregated using the cooperative model.

    This system will have to collapse and be reordered from the broken pieces of the hologram. It is likely that alternative treatment methods and technologies will rise and eclipse the current industrial model along with innovations in risk. It’s the old “destroy the village” to save it deal.

    At the root of this problem are classes of people, primarily attorneys, journalists, historians, and political science types who think that taking one class in Samuelson economics and staying multiple nights in a Holiday Inn give them the credentials to design a complex economic sector using crude macro economic tools.

    The legislative thrust will only fuel the fires of inflation, exacerbate the problems and cause the seeds of destruction to sprout. After thirty years of involvement in health reform, I am like Ashely Brilliant. I have abandoned all hope of enlightenment and instead am looking for a good fantasy.

  70. Medicare and Medicaid allow health providers to cover their fixed costs and sell at the margin to private payers. They run like fixed cost railroads and their charging methods are not rational or based on price signaling from a market. They are forced by large payors through negotiation.

  71. TR’s book was written through a lense and filtered by his personal predispositions. It is not rationally based on economics. The problem with health care costs are not in the profits, except to the extent there are a lot of fish in the food chain and everybody thinks he deserves a profit. But, that exists for all products and services.

    The real problem is the gross inefficiency of health providers and the dysfunction of the market. Inefficient, low quality providers cannot be identified, and even if they were, they would not be rewarded with additional business in the current system. When have you seen a low quality, inefficient provider shutter his doors and exit the market? Only when a hurricane takes out the facility and they quietly decide not to rebuild.

  72. Medicare (insurance) would cost $565 per month per
    enrolee under 65 years of age. That is unaffordable.
    It is unaffordable to the recipient and taxpayers.
    We don’t want socialism like Europe and Canada. We
    prefer to “pursue happiness” (obtain wealth) (NOT
    Health) care “insurance” REFORM. Are we clear?

  73. Bill,
    You also need to add into the pot they have for investment the “reserves for unpaid claims” which can be enormous. That’s where they stash their mad money that they use for their gambling in the market and empire building.

    This is a handy place to keep it so they can look impoverished to the insurance regulators and thus show the need to raise premiums. I’m not sure right now if that also keeps it invisible to the tax collectors.

    What you presented about true profits is exactly right. But there is another thing. You have to look at insurance corps as cost plus contractors.

    They figure their anticipated cost of overall payments to providers, based on known risks including their way of doing business (keeping their pool clean vs. taking all comers, rescission practices, speed of paying …) then add on their 15% to 25% depending on whether they want to show 85% to 75% of payout.

    So it really doesn’t matter too much to the insurers if the providers charge $20 or $200 for a device. As long as they can predict in aggregate it’s fine. So they don’t have much incentive to put downward pressure on their suppliers cost. Which is of course, what needs to happen.

    The big problem is that while PROFIT is given as a pitiful 3% or so, their is no disaggregation of “administrative costs which are a much larger share of the premium less payout cost.

    So some administrative costs are necessary and important but the luxury costs are absurd and the real drain on the system. The outrageous salaries and trappings of power like private airplanes and sales meetings in luxury resorts in the Caribbean, and other unnecessary extravagances are what most people think of when they say “profit.”

    Those super extravagances don’t go away if a company is a non-profit! The execs of non-profits that don’t live off donations do not scrimp on salaries and perquisites. They feel entitled to keep up with the Industry.

    They rarely disclose any of this to the regulators when they apply for premium raises. Few state regulators do much more than look at what they show and tell. Audits are rare. An audit by the Insurance Commissioner of ND of BCBS (a 92% share of the state) which was online briefly was an eye opener. (I have a copy which I could e-mail.) The auditor was harsh but I think the execs and board should have been hung.

    So those that trumpet non-profits will solve all our problems are nuts. They should be run by civil service employees with published pay scales and an active Inspector General.

  74. Beowulf,

    The Medicare reimbursement within 15-30 days is a Congressional mandate. Doctors whined. Unfortunately it has spawned the biggest scam/fraud of them all. Fake suppliers set up fake stores with a little stuff for show in case they are checked. They then bill for a long list of equipment or prescriptions for a large number of patients. They buy the patient lists from crooked office or hospital workers or occasionally doctors; the going price is $20 per name.

    They file, get paid, automatically to their brand new bank account, then disappear to a new storefront, a new supplier name and bank account and run it by again.

    They are paid before they even get inspected. Probably 95% of suppliers of DME and prescriptions in the Miami area are scams. The FBI is handicapped by the laws. Once in a while they round up a gang.

    These scams amount to $60 Billion dollars each year! Imagine. $60 Billion a year just happens to be $600 Billion. That is where the $500 Billion savings to Medicare will come from.

    Not one bit of the supplies ever goes to or was intended to go to any patient. Not one patient’s care is lessened by one bit from eliminating this fraud. This is where you cut Medicare expenditures without cutting benefits.

    There are fixes in this bill that will allow putting these crooks out of work. Electronic records are a big part.

  75. projectshave

    I believe return on equity is the pertinent number for insurance companies. Aetna makes 14%. Add 3% profit and you’ve nearly beaten pharma. That’s why Buffett loves the insurance biz.