

Just How Profitable Are Healthcare Insurers? - lwc123
http://larrycheng.com/2010/03/08/just-how-profitable-are-healthcare-insurers/

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ireadzalot
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/he...](http://www.economist.com/blogs/democracyinamerica/2010/03/health_care_reform)

~~~
tullius
Profit margin is the important metric to look at in the context of moving to a
socialized system. The stats in the linked article say that even if a public
entity could run as efficiently as a private insurer there is only 3.7%
surplus value to capture.

~~~
rwl
You are assuming that a public entity couldn't run _more_ efficiently than a
system of private ones, which is exactly the point -- or one of the points --
at issue.

------
jrockway
All this means is that the insurance companies spend most of the money they
take in. They could hire x more employees and then they wouldn't be profitable
at all. That doesn't mean they are tirelessly working to save you money, it
just means they aren't profitable. I wouldn't read too far into this data.

~~~
jbooth
Don't have a cite offhand but insurance industry employment has gone up by
quite a lot (close to double if I recall correctly) since 2000.

Let's say I'm an insurance CEO. You tell me, that by spending 20 million on
increased claim scrutiny, we'll net 1 million in total savings by disbursing
21 million fewer dollars.

What do I do there? It's obvious, I go for the 1 million. So I just spent 20
million in order to hand out 21 million fewer dollars. The policy holders are
worse off, the country's worse off, and the insurance company only got a
crappy 1 million out of it, compared to the 21 million they're no longer
disbursing.

All perfectly rational given the incentives -- which is why the system's
broken.

~~~
anamax
Insurance companies are, however, subject to "the law". Govt agencies mostly
aren't.

Feel free to compare Medicare's dispute process with that of an insurance
company. And remember that some people can switch insurance companies while no
one can switch Medicare.

We can make switching insurance companies easier. Switching "single payers"
is, by definition, impossible.

~~~
jbooth
The government is indeed subject to the law, much more stringently than
insurance companies in fact. Try doing something nominally illegal in a
government agency.

The government can pass laws, of course.. but the insurance industry can hire
lobbyists. Seems like an awful uphill battle to beat those guys, based on the
last 60 years of healthcare reform history. Harry and Louise can be pretty
influential.

Medicare's dispute process with that of an insurance company? Well, I'll tell
you one thing, Medicare doesn't spend the 20 million to deny 21 million
dollars in claims like I outlined above.

We should make switching insurance companies easier, but that doesn't get us
anywhere if they're all embracing the same bad practices. I don't have the
option of starting an insurance company out of my garage like you could with a
tech startup -- if the incumbents consist of a broken oligarchy, that's what
we're stuck with, absent government action. There are so many classic
incentive problems in play here, tragedy of the commons, free-rider problem..
it's frankly a wonder that things aren't broken even worse.

With government run healthcare you get the benefit of proper incentives at the
cost of government-run bureaucracy, which will always be a little less
efficient. That's the tradeoff.. as far as which is more effective, we could
look at every other industrialized country which gets better outcomes for a
fraction of the cost, or we could appeal to ideology, fears of vague things
like "socialism", and absurdities like "keep the government out of my
medicare".

~~~
anamax
> The government is indeed subject to the law, much more stringently than
> insurance companies in fact. Try doing something nominally illegal in a
> government agency.

You're talking about rules for employees. I'm talking about interaction with
clients. When the DMV says "no", you're basically hosed.

> Well, I'll tell you one thing, Medicare doesn't spend the 20 million to deny
> 21 million dollars in claims like I outlined above.

Actually, it does. More to the point, the rules are such that it doesn't have
to spend much money to deny and there's almost nothing that you can do about
it.

> We should make switching insurance companies easier, but that doesn't get us
> anywhere if they're all embracing the same bad practices.

Competition results in better customer service in every other industry, why is
health insurance different?

> I don't have the option of starting an insurance company out of my garage
> like you could with a tech startup

Actually, you do. All it takes is some money and a decent risk model, and you
can bootstrap by providing services to companies that self-insure, which
significantly reduces the money required.

> That's the tradeoff.. as far as which is more effective, we could look at
> every other industrialized country which gets better outcomes for a fraction
> of the cost

Not on comparable populations.

------
roboneal
Can we get past the fact that "healthcare insurance" isn't really insurance?

True insurance essentially "insures" against catastrophic loss and policies
are underwritten on a personalized basis.

"Health insurance" often covers routine care, medications, diagnostic tests,
etc -- hides the actual costs behind devices like "co-pays" and distributes
cost inflation across the "group" instead the high risk/sick individual.

How expensive would your car insurance be if it covered oil changes, car
washes, body repair and then lumped you, the driver with a clean record, with
your neighbor with his 5th DUI?

~~~
owinebarger
And what makes you think you aren't lumped in with your neighbor?

Every rational form of insurance relies on distributing risk over groups of
independent risks to obtain the benefits of the central limit theorem. There
are some very specialized policies, and the Lloyd's syndicate, but anyone
wishing to avoid ruin will diversify their risk.

~~~
roboneal
You missed the critical point...health "insurance" in the traditional
workplace is not UNDERWRITTEN on individual basis like life or car insurance.

22-year old single, marathon runners pay the same rate as a 37-year old,
single, lazy, 300lb HackerNews commenters.

That and the fact that routine care/services are "paid" for by so called
"health insurance" is why it's bogus to compare it to standard insurance.

~~~
owinebarger
I have no idea what definition you are using for "standard insurance." Health
insurance does cover routine care, but that's actually a loss control
mechanism in the longer term.

Health insurance sold on a group basis is underwritten on a group basis. That
does not have anything to do with whether it is "real insurance." Health
insurance sold on an individual basis is underwritten on that basis, but rate
differentials may be severely constrained by statute or regulation.

These do not affect whether financial risk is transferred. The routine care
issue does impinge on a valid consideration of whether the transferred risk is
"insurable", but since these are short-term contracts it is not fatal.

~~~
roboneal
Does your auto insurance pay for your defensive driving courses? Your
homeowner's policy pay for additional smoke detectors? Your life insurance
policy pay for a treadmill?

What would those policies cost if they did?

~~~
owinebarger
To some extent, they do in the form of a premium rebate, though it is unlikely
to be large enough to be a substantial reimbursement for a single policy
period - perhaps over the life of the policy the cumulative rebate might cover
the up-front cost. I haven't worked in casualty, only health, so I can only
speculate.

The better comparison would be with Worker's Compensation insurance, where the
loss control mechanisms are ongoing.

As far as what the policies would cost, I don't know. Even if routine medical
care is fully covered, a lot of people won't take advantage of it for whatever
reason. An insurer's actuarial models will build that expected frequency into
the projected cost.

If it bothers you sufficiently, you may consider most health plans to be the
sum of a "real insurance" policy and a routine health discount plan. There are
health plans that truly avoid assuming substantial risk, although they do so
by getting providers to assume the risk. Those plans do retain the risk of
providers in their network going bankrupt where prepaid capitation would be
lost.

~~~
roboneal
Do the insurance companies pay for safety equipment or training in their
customer's workplaces? No.

Employers pay those costs themselves in return for rate reductions. Not sure
how that differs from any of my other comparisons (auto, life, homeowner's).

I think you have to admit that one's health care premiums have nothing to do
with that individual's "actuarial" risk to the insurance company. There is not
a single form of insurance that follows that pattern. NONE.

~~~
owinebarger
They forego revenue in exchange for the loss control. It's economically
equivalent. This is like those discussions of whether taxes that are charged
directly to businesses are paid by the business or by their customers.

As for the other, I admit health care insurance has its own peculiarities that
make it a distinct field of insurance. And, no, your last assertion is
incorrect. I have the advantage of having actually worked in the group pricing
department of a major health insurer, so I'm not just speculating here. In
lieu of further banging my head against the wall, I'll point out that the
syllabi for the SOA's actuarial exams are available to the general public -
just look in the "education" section of their site.

~~~
roboneal
"They forego revenue in exchange for the loss control."

You obviously don't understand insurance outside of healthcare, if the
insurance companies' underwriters and actuaries do their job right - the
profit/revenue of all policy types is the same regardless of risk.

High risk=High rates, Low risk=low rates. Revenue/risk is balanced.

We all suffer spiraling healthcare costs because there is little correlation
to what you pay for healthcare insurance and your overall risk to the insurer.

"Group underwriting" only exists in the healthcare industry - no where else.

------
marshally
Another important factor here is the amount of reserves that are held back
from each $1 of premiums input into the system.

For a single payer system, the idea of reserves is non-sensical (similar to
the farce of the 'social security trust fund' which makes zero sense from a
macro economic perspective). I would make the point that reserves are a waste
product of an insurance based system.

~~~
anamax
> Another important factor here is the amount of reserves that are held back
> from each $1 of premiums input into the system.

You're forgetting that insurance companies invest that money.

There are times when claims payout exceeds the premiums, yet insurance
companies still manage to make money because of the investments.

As always, if you think that you can do insurance better, go for it. If you're
right, you get rich and drive them out of biz.

~~~
GFischer
I work for an insurance company.

The company makes an operational loss, but it makes a killing in the financial
market, and is thus (very) profitable.

Claims don't exceed the premiums, but it's narrow.

------
ibsulon
1\. I don't think anyone would complain about health care if it was handled
well by insurance companies. However, health care, by and large, is suboptimal
in this country. <http://ucatlas.ucsc.edu/spend.php> shows the price to
outcome outlier that we are.

2\. We need to look at profits in the health care industry as similar to a
VAT. If you have a profit margin at the end of the line, even if it's 18%,
it's not that big of a deal. However, if each segment along the line adds a
VAT, even a 5% tax of every segment can add up to a third of the cost,
depending on how deep the pipeline goes. Each segment of the line is taking a
profit. 3% of the health care industry, x% of the hospital (less than you
would think because they subsidize so much of the uninsured) y% from the
pharmaceutical industry, z% from the individually owned clinic... The end
result is a disproportionately expensive system in this country.

------
DennisP
Their profit is irrelevant to me. The important number is their medical loss
ration: how much of my premiums go into actually paying for healthcare. In the
U.S., shareholders get antsy if insurers pay more than 80% of their premiums
on healthcare, and some insurers pay less than that. In France, Germany, and
Japan, private non-profit insurers spend over 95% of premiums on healthcare.
(Source: The Healing of America by T.R. Reid)

One expense for U.S. insurers is medical underwriting - the army of people
they employ to find reasons to deny you coverage. The reason they have to do
this is that their competitors are doing it. Anyone who provides better
coverage at a good price will be swarmed by sick people and go out of
business, so they are in an arms race to provide the worst coverage they can
get away with.

Level the playing field by, eg., requiring coverage of pre-existing conditions
(as the countries I mentioned do) and this arms race goes away.

------
protomyth
If a business makes a profit by serving its customers, I'm ok with that. At
this point, given how messed up the health care system is (law, super
expensive EOL care, high entry cost for doctors and nurses, poor non-emergency
care situation), can you really do the right things. Given the failure of
Indian Health Service in serving its customers (to the point of pinning a note
that says "we won't pay" on a person transferring to a hospital), I know the
government can't even on a loss / non-profit basis.

I almost think the government should start with tuition incentives / loan
relief for doctors and nurses, and create a government cataclysmic insurance
fund that covers stuff over a $100K (think flood insurance).

~~~
anamax
> this point, given how messed up the health care system is (law, super
> expensive EOL care, high entry cost for doctors and nurses, poor non-
> emergency care situation), can you really do the right things.

Which of those factors are due to insurance companies?

If you don't fix them, how likely is it that any "new" system will be any
better?

~~~
protomyth
Those factors are the landscape the insurance companies operate in. The
biggest problem is that I don't see any of the actual legislation doing
anything about actual input costs to the system or increasing competition.

~~~
anamax
> The biggest problem is that I don't see any of the actual legislation doing
> anything about actual input costs to the system or increasing competition.

Not to be rude, but where have you looked?

Besides, if that sort of legislation is what is required, how does its absence
justify doing something else?

~~~
protomyth
Well, the last time it was on one of the senator's websites. I admit I was
skimming to look if some things were changing for certain currently funded
programs, but I kept my eye out for other stuff.

Politics are political. Each party is funded by people who want parts of the
current system to stay the same or change for their benefit. Trial Lawyers (D)
and Drug Companies (R) for example have huge stakes. I ignore what a
politician says and look at the actual documents. I admit, lately, it has been
really hard to get ahold of bills. I worry about the urgency that doesn't let
a bill be posted and reviewed before voting.

~~~
anamax
> Well, the last time it was on one of the senator's websites.

That's better than nothing, but if you looked at a Repub senator's website,
you're unlikely to see all Repub proposals, let alone Dem proposals. The
reverse is also true.

> I ignore what a politician says and look at the actual documents. I admit,
> lately, it has been really hard to get ahold of bills. I worry about the
> urgency that doesn't let a bill be posted and reviewed before voting.

I agree with all that.

~~~
protomyth
You know, I really don't remember which party, it was a pointer over to the
full house's site. This hiding of bills has to stop. It is the information age
and I had a lot easier time getting the full text of a bill ten years ago.

I'm just worried everyone is going to have the same "end of fiscal year no
money for you" that has plagued the reservations under IHS. The sad part is
the coverage of the news media is so poor on these, that the few stories that
have gone out are thought of as aberrations instead of the day to day reality.
I just wished the gov (both parties) would prove they could get it done with
the limited population already served before moving on.

~~~
anamax
> I just wished the gov (both parties) would prove they could get it done with
> the limited population already served before moving on.

I agree. In fact, that's exactly my proposal - try out nationalized healthcare
on federal employees and so on.

------
owinebarger
The problem for healthcare insurers is that healthcare is a product often
obtained while under duress. Patients have to trust their doctors, so they'd
much rather call their insurers greedy than the people to whom they entrust
their most valuable asset.

If you want to look for greed in healthcare, look at medical schools,
hospitals, doctors, and pharmaceutical and medical device manufacturers.
Insurance costs are a simple reflection of the incomes of those parties. State
regulators (for small group and individuals) and shopping around by
sophisticated consumers (large groups) assures that.

------
guelo
If they could figure out how to get rid of their sick customers they could
increase their margins. I wonder if they've thought of that.

------
pw0ncakes
Most Americans (probably 80-90%) conflate corporate greed with _profits_ ,
which is the wrong way to look at the problem. Most of the asshole greed we
see today is not in profit _per se_ , but in back-scratching compensation
deals for top management. Note that CEO pay is not profit. It's an expense.
Most Americans either don't make or are unaware of this distinction.
Managerial overcompensation is strictly _worse_ , because at least one can
invest in a company that is "profiting too much".

I'd like to see the data for other years. Recessions are bad for health
insurers, because when people get fired, young and healthy people tend to drop
their insurance while those who are older stay on the plan (with COBRA). So
adverse selection sets in and insurance companies lose.

~~~
CWuestefeld
_Most of the asshole greed we see today is not in profit per se, but in back-
scratching compensation deals for top management._

Citation, please? I'm _very_ skeptical that pay for top execs amounts to a
really significant part of corporate expenses, or that corporate profits could
be increased substantially by cutting these expenses.

~~~
pw0ncakes
Executive pay may be small compared to the corporate balance sheet, but the
level it's at allows for and encourages bad behavior.

1\. The extreme disparity between CEO pay and other vital executives
encourages people to backstab in order to ascend the hierarchy. So "work" for
those who are in line to be CEOs is more about jockeying for position and
trading favors than about building a company.

2\. In addition to (1), such disparities are bad for morale, especially when
the CEO is a "hired gun" instead of someone who has been part of the company
for a long time.

Except in athletics, where talent is objectively measurable, the "star system"
tends to piss off everyone but the stars, and let's be realistic: non-stars
are 99% of people, and probably 3/4 of those who would be considered
objectively the most competent.

3\. When the CEO makes $500,000/year, he's drawing a good salary but still has
the incentive to build a legitimately strong company for the long-term. When
he has a "performance bonus" that will give him fuck-you money in 12 months if
he plays his cards right, his incentives are in the short term.

4\. When there are massive discrepancies in pay between the bosses and the
people they are managing, the social class and lifestyle disconnects become
problematic and can damage morale. This is why the best CEOs try to appear
middle-class in terms of dress and work habits.

CEO pay is at such a level that it actually brings _lower_ quality of
management. This is what's truly alarming. Decades ago, when CEO pay was much
lower, American companies were well-managed and produced great products like
(imagine this for a second) cars that people actually wanted to buy. Now, big-
company CEOs command stratospheric salaries and generally such ass. This is
because executive pay is so high that it has pushed these people completely
out of touch with reality.

~~~
tullius
Companies are much better managed now than they were a few decades ago. Think
about the fact that corporate raiders were able to buy large companies in the
80's, split them apart and sell their constituent lines of business for more
than the companies were previously worth.

CEO pay has simply increased in line with the market capitalization of the
largest public companies.

~~~
pw0ncakes
The stock market is a poor arbiter of whether a business decision is good for
the long run. Traders are good at outguessing each other in the short term,
but have no sense of the long term.

~~~
CWuestefeld
Again, how about a citation? On what basis do you believe that they're not
reflecting the long term?

------
rit
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%.

~~~
jdminhbg
That's not an argument, it's just an assertion of taste.

