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View Full Version : FACT CHECK: Health insurer profits not so fat



Eric Johnson
10-25-2009, 10:14 AM
http://apnews.myway.com/article/20091025/D9BI4D6O1.html

http://tinyurl.com/yk5ya9a

Oct 25, 8:37 AM (ET)

By CALVIN WOODWARD

WASHINGTON (AP) - Quick quiz: What do these enterprises have in common? Farm and construction machinery, Tupperware, the railroads, Hershey sweets, Yum food brands and Yahoo? Answer: They're all more profitable than the health insurance industry. In the health care debate, Democrats and their allies have gone after insurance companies as rapacious profiteers making "immoral" and "obscene" returns while "the bodies pile up."

Ledgers tell a different reality. Health insurance profit margins typically run about 6 percent, give or take a point or two. That's anemic compared with other forms of insurance and a broad array of industries, even some beleaguered ones.

-more-

code3retrievers
10-25-2009, 02:20 PM
Any profit is seen as immoral as far as the left is concerned.

Look at the energy companies, insurance, company farms, and drug companies. Even though without these companies we would not be the great country we are, the left would like to take over or at least reduce the profits of each of these due to their influence on our daily life.

The left just doesn't get it! You can't fix stupid.

YardleyLabs
10-25-2009, 03:11 PM
Health insurance profitability has always been a fairly murky topic since historically most companies providing health insurance also provided other services, a trend that has shifted more recently. A large part, albeit shrinking, portion of the industry is also made up of non-profits -- primarily those Blue Cross/Blue Shield operations that have not yet converted to for profit structures. Many of the top players -- for example MetLife, which used to be the number one provider of health insurance in the country -- withdrew from the industry because it had stopped being a true insurance business and had instead evolved into a claims management business. In fact, the overwhelming bulk of group plans leave the primary risk with the employer, not the insurance company. The plan sponsor, typically the employer, is responsible for all claim costs plus an administrative fee. For those segments of the business, profitability is best measured as a percentage of administrative fees, not claims paid (that, for example, is the way brokerage companies measure profits, not based on the value of customer trades). There are also questions about how investment returns are handled since insurance premiums generate substantial cash flows that are invested. While those profits have dramatically declined in the last two years, investment returns are typically the primary source of industry profit. However, those profits are normally accounted for separately from "insurance" profits. Those components of the health insurance business that are truly risk based are much more profitable, and in the case of personal health coverage involve profit margins that are very high (often 40% of premiums paid).

The more traditional measure of insurance company profitability is return on equity. In 2008, return on equity plunged because of the market collapse. Despite that collapse, United Health generated totsl return on equity of more than 17%/year during the period 1998-2008 -- not too shabby. Even during the disastrous 2008, most of the major players earned more than 10% returns on shareholder equity.

Even with all that, I have never believed that insurance company profits are a significant issue driving health care costs. The same cannot be said for those companies providing benefit/health management services, prescripton management services, pharmaceutical services, medical equipment services, etc.

M&K's Retrievers
10-25-2009, 04:00 PM
[QUOTE=YardleyLabs;516476] Those components of the health insurance business that are truly risk based are much more profitable, and in the case of personal health coverage involve profit margins that are very high (often 40% of premiums paid).



Where did you come up with this BS? If this were true there would be more insurance companies on this 'Gravy Train'. The reduction in insurance carriers willing to write comprehensive major medical insurance for small employers (2-99 lives) and individuals has reduced dramaticly in the last 15 years to just a handfull. There are companies which write the more profitable lines like long and short term disability, dental , cancer plans and life insurance. There are also those companies that write limited coverage plans of dubious reputations (large print giveth and the small print taketh away). Perhaps these are the profitable companies to which you refer.

dnf777
10-25-2009, 04:02 PM
Any profit is seen as immoral as far as the left is concerned.

Look at the energy companies, insurance, company farms, and drug companies. Even though without these companies we would not be the great country we are, the left would like to take over or at least reduce the profits of each of these due to their influence on our daily life.

The left just doesn't get it! You can't fix stupid.

That is way overboard. You don't think there are any liberal entrepreneurs? Any liberals who support profits? I guess Hollywood producers and actors didn't get the message yet! What most liberals are against I believe, is profiteers like Kenneth Lay (Kenny-boy) and Madoff. Are these acceptable practices they committed in the name of profit according to conservatives? Its been so long since I was a republican, I can't remember if I ever supported such practices. ;-)

YardleyLabs
10-25-2009, 04:16 PM
[quote=YardleyLabs;516476] Those components of the health insurance business that are truly risk based are much more profitable, and in the case of personal health coverage involve profit margins that are very high (often 40% of premiums paid).



Where did you come up with this BS? If this were true there would be more insurance companies on this 'Gravy Train'. The reduction in insurance carriers willing to write comprehensive major medical insurance for small employers (2-99 lives) and individuals has reduced dramaticly in the last 15 years to just a handfull. There are companies which write the more profitable lines like long and short term disability, dental , cancer plans and life insurance. There are also those companies that write limited coverage plans of dubious reputations (large print giveth and the small print taketh away). Perhaps these are the profitable companies to which you refer.
Your bolded statement is absolutely true. The reason is that the risk factors are too unpredictable unless the group can ensure 100% participation so that there is no adverse selection. That is also why any government regulations that seriously restrict the ability of insurers to exclude pre-existing conditions and high risk individuals will fail unless it is accompanied by a mandate for universal or virtually universal coverage. You cannot do one without the other. The fact that the availability of small group coverage has declined is because of government regulations restricting the insurane companies' abilities to manage these risks. In my company, our coverage was canceled because we were unable to ensure full coverage. The high margin business is generally related to higher risk personal policies and lines of business, such as a number of the plans offered by Aetna for small groups, that provide very high co-pays (typically 40%) with high deductibles and low lifetime limits, plus exclusions of coverage for some treatments for some of the more serious illnesses. If you want to see evidence of premium claim ratios, search for analyses by state insurance commissions. I have posted links previously. As to where i come up with this "BS", it is from more than 30 years of work in and around the health insurance industry.

M&K's Retrievers
10-25-2009, 05:15 PM
[quote=M&K's Retrievers;516499]
Your bolded statement is absolutely true. The reason is that the risk factors are too unpredictable unless the group can ensure 100% participation so that there is no adverse selection. That is also why any government regulations that seriously restrict the ability of insurers to exclude pre-existing conditions and high risk individuals will fail unless it is accompanied by a mandate for universal or virtually universal coverage. You cannot do one without the other. The fact that the availability of small group coverage has declined is because of government regulations restricting the insurane companies' abilities to manage these risks. In my company, our coverage was canceled because we were unable to ensure full coverage. The high margin business is generally related to higher risk personal policies and lines of business, such as a number of the plans offered by Aetna for small groups, that provide very high co-pays (typically 40%) with high deductibles and low lifetime limits, plus exclusions of coverage for some treatments for some of the more serious illnesses. If you want to see evidence of premium claim ratios, search for analyses by state insurance commissions. I have posted links previously. As to where i come up with this "BS", it is from more than 30 years of work in and around the health insurance industry.

Group health insurance is what I do for a living. Your experience may come from 30 years of buying rate increases. Mine comes from 35 years of trying to sell them along with managing a large block of small group business and self-funded programs.

Carriers started dropping like flies soon after the time Hilary was trying to pass health care reform. While she didn't manage to get anything done on the federal level, she did lite the fires in most states to pass "Small Group Reform" which added mandate after mandate that made it impossible for most carriers to compete. They mandated "womb to tomb" coverage rather than catastrophic coverage. They are attempting to do the same thing now only worse.

But I digress. I questioned your "BS" about health carriers making 40% profits and which products these carriers underwrite. It is not the companies that write group and individual major medical insurance.

As far as your compny being cancelled for low participation, maybe you should consider raising your contribution to the cost of the plan so more of your employees can afford it. On second thought, just wait. Obama will fix it for you

YardleyLabs
10-25-2009, 05:52 PM
My experience is generally in the administration of health benefit programs. I have acted as a consultant on systems and procedures for major corporate buyers of benefits and for major insurance companies, where I have conducted general management reviews of their operations and provided advice on improvements. I have also been involved in the process of reimbursement rate setting and ran NYC's then $4 billion Medicaid program long, long ago. I also spent a few years as director of management for a multi-billion dollar, 40,000 employee hospital corporation.

Many states have regulations that tie approvals of small group policy premiums to claim ratios experienced by providers. The most limiting regulations are in states like New York and New Jersey where small group claim ratios must be higher than 75% of premiums paid in claims for approval of rate increases. As a consequence, many insurers have pulled out of these states. Other states limit ratios to a minimum of 60-65% and other states have no such limits. The lowest claim ratios are found in specialty policies that sometimes verge on the fraudulent in their marketing. Most famous, of course, are the AFLAC policies. These are not general coverage group plans. In a survey conducted in 2008, Families USA reported that "In interviews with insurance regulators in 19 states, Families USA learned that insurers in the individual market sometimes maintain medical loss ratios of only 60 percent,retaining 40 percent of premium dollars for administration, marketing, and profit." Plans marketed to University students and often required by colleges often fall into the abusive category using low limits for daily benefit caps and policy maximums to limit coverage while giving the illusion of comprehensive benefits. In eggregious cases, such as some policies issued by United Health Care, claim ratios may be as low as 10-20% of premiums paid (http://www.pnhp.org/news/2008/may/unitedheathcares_pl.php). These are not normal policies, but are exactly the types of policies that would be prohibited under the proposed health insurance reform proposals in the definition of qualified plans.

As you look at employer group plans generally, loss ratios run around 85%. When you look at individual policies however, the loss ratios decline to about 60% (See, for example, http://www.nhhealthcost.org/employerInsuranceRatios.aspx) (http://www.nhhealthcost.org/employerInsuranceRatios.aspx)

M&K's Retrievers
10-25-2009, 09:16 PM
Yardley quote "The lowest claim ratios are found in specialty policies that sometimes verge on the fraudulent in their marketing. Most famous, of course, are the AFLAC policies. These are not general coverage group plans. In a survey conducted in 2008, Families USA reported that "In interviews with insurance regulators in 19 states, Families USA learned that insurers in the individual market sometimes maintain medical loss ratios of only 60 percent,retaining 40 percent of premium dollars for administration, marketing, and profit." Plans marketed to University students and often required by colleges often fall into the abusive category using low limits for daily benefit caps and policy maximums to limit coverage while giving the illusion of comprehensive benefits. In eggregious cases, such as some policies issued by United Health Care, claim ratios may be as low as 10-20% of premiums paid (http://www.pnhp.org/news/2008/may/unitedheathcares_pl.php). These are not normal policies, but are exactly the types of policies that would be prohibited under the proposed health insurance reform proposals in the definition of qualified plans."

These are some of the "large print small print Policies" I referred to earlier and have no more business in a discussion of health insurance than warranty coverage is the same as auto insurance.

Yardley quote "As you look at employer group plans generally, loss ratios run around 85%. When you look at individual policies however, the loss ratios decline to about 60% (See, for example, http://www.nhhealthcost.org/employerInsuranceRatios.aspx) (http://www.nhhealthcost.org/employerInsuranceRatios.aspx)[/QUOTE]"

This is a very small sample but group with an 85% loss ratio is losing money. In fact all of these shown are losers. Again, small sample.

code3retrievers
10-25-2009, 09:21 PM
That is way overboard. You don't think there are any liberal entrepreneurs? Any liberals who support profits? I guess Hollywood producers and actors didn't get the message yet! What most liberals are against I believe, is profiteers like Kenneth Lay (Kenny-boy) and Madoff. Are these acceptable practices they committed in the name of profit according to conservatives? Its been so long since I was a republican, I can't remember if I ever supported such practices. ;-)

I stated nothing over board. Your president and your liberal congressmen have been attacking American businesses that make a profit for the past several years. They have described their profits as immoral and obscene as if they are in business to give their products away.
Did I say anything about Lay and Madoff (crooks). NO, I mentioned only the industries that your leaders have attacked and bullied.
When prices rise in an industry the first reaction on the left is to claim price gouging. Perhaps it is a shortage of those goods that caused the rise. (remember supply and demand)

All I see from the left is hate speech towards any other point of view and this administration trying to bully anyone that does not agree with their radical take over of our economy. They talk about regulation but I have not seen any new regs, only take overs.

Gerry Clinchy
10-26-2009, 05:12 AM
Yardley

Families USA learned that insurers in the individual market sometimes maintain medical loss ratios of only 60 percent,retaining 40 percent of premium dollars for administration, marketing, and profit."

I note that the 40% includes more than just profit ...

Based on our govt's track record for "administrative costs" on anything they do, I'd expect that we won't be saving a whole lot on that part of the equation.

For example, if we include executive compensation of insurance company executives in administrative costs, should we not also include the compensation for the "health czar" (whoever that may turn out to be) as part of administrative costs for the govt?

Can we assess a cost for the time that hundreds (if not thousands) of individuals (Congresspeople & their staffs) have already consumed coming up with the hodge-podge bills they have so far proposed? The paper, alone, to print out thousands of pages of proposals should be a nice chunk of change.

I'd also mention that it has always been the basis of "insurance" that the companies providing the coverage invest the excess funds collected in order to provide for future claims. That is the whole actuarial basis for determining how much premium is needed to be charged. When the costs escalate rapidly, then premiums will increase because the investments cannot keep up with unanticipated rapidity of increasing costs.

I have little, or no, faith that our govt has been very good at predicting future costs of any given program. Historically, our govt representatives cannot stand to see surpluses accrue without spending them ... forgetting that those surpluses were part of the plan for future fiscal soundness of a program.

txbadger
10-26-2009, 06:43 AM
Here's another report which differ from Yardley's

Page 14 Of MN Ratios:

http://www.state.mn.us/mn/externalDocs/Commerce/Current_Loss_Ratio_Report_052104013421_LossRatioRe port.pdf

Total 2008 Individual Premium 595M Claims: 457M 92% Claims ratio


Page 16:


Total Small employer Prem 1.542B Claims 1.337B 87% Claims Ratio

As a former VP of a major insurance company all I can say is there are over 1800 insurance companies licensed to sell health insurance but only a few do. But over 1800 sell life insurance, need to buy a clue? Our federal employees have private insurance for a reason.....

YardleyLabs
10-26-2009, 08:39 AM
Here's another report which differ from Yardley's

Page 14 Of MN Ratios:

http://www.state.mn.us/mn/externalDocs/Commerce/Current_Loss_Ratio_Report_052104013421_LossRatioRe port.pdf

Total 2008 Individual Premium 595M Claims: 457M 92% Claims ratio


Page 16:


Total Small employer Prem 1.542B Claims 1.337B 87% Claims Ratio

As a former VP of a major insurance company all I can say is there are over 1800 insurance companies licensed to sell health insurance but only a few do. But over 1800 sell life insurance, need to buy a clue? Our federal employees have private insurance for a reason.....
If yu read the report you referenced, you will find that the high loss ratios in Minnesota reflect the fact that 70% of the individual policy market is controlled by a single non-profit provider that operates with a loss ratio of 92%. That effectively defines the competitive market for all other players. As I noted in my oroginal comments, one of the problems is interpreting insurance returns is that non-profits are still a major market force in many states and distort results when included with states where non-profits are not a significant force.

M&K's Retrievers
10-27-2009, 12:12 AM
If yu read the report you referenced, you will find that the high loss ratios in Minnesota reflect the fact that 70% of the individual policy market is controlled by a single non-profit provider that operates with a loss ratio of 92%. That effectively defines the competitive market for all other players. As I noted in my oroginal comments, one of the problems is interpreting insurance returns is that non-profits are still a major market force in many states and distort results when included with states where non-profits are not a significant force.

I assumed you were a bean counter but I'm certain your not an actuary. If you are , you would not base your coments on such small samples and quote numbers you think prove your point.

YardleyLabs
10-27-2009, 06:15 AM
I assumed you were a bean counter but I'm certain your not an actuary. If you are , you would not base your coments on such small samples and quote numbers you think prove your point.
You can track down the reports from different states yourself. I have, through various Google searches, found retention rate/loss ratio analyses published by most of the major state insurance commissioners at various times over the last year, but not in any one effort. They all tell essentially the same story. The American Families survey of states included 19 states representing the majority of all policies in the country. It was not a sample, but a complete analysis of each of those states for the period 2007-2008. I am a former partner in Ernst & Young, but am not an accountant. I studied statistics at the graduate level but am not an actuary. I do recognize the difference between a sample and an accounting of all business in a state. I also recognize that the insurance industry is regulated by each state independently and that what is happening in one state does not reflect what is happening in an another. That is the reason for state "surveys" to identify specific conditions.

Eric Johnson
10-27-2009, 03:03 PM
All the hand waving and rhetoric aside.....

"Health insurers posted a 2.2 percent profit margin last year, placing them 35th on the Fortune 500 list of top industries...."

The health insurance biz doesn't seem to have the obscene profits that Nancy Pelosi (and others) claims. Is she just lying to us or is it that she hasn't done her homework? Perhaps she doesn't really know...but should. In either case, are we truly expected to roll over and accept a healthcare plan crafted by either liars or the uninformed?

I'm happy with my healthcare. Leave it alone. There's no reason why I should pay more money for less healthcare.

Eric

M&K's Retrievers
10-27-2009, 11:48 PM
You can track down the reports from different states yourself. I have, through various Google searches, found retention rate/loss ratio analyses published by most of the major state insurance commissioners at various times over the last year, but not in any one effort. They all tell essentially the same story. The American Families survey of states included 19 states representing the majority of all policies in the country. It was not a sample, but a complete analysis of each of those states for the period 2007-2008. I am a former partner in Ernst & Young, but am not an accountant. I studied statistics at the graduate level but am not an actuary. I do recognize the difference between a sample and an accounting of all business in a state. I also recognize that the insurance industry is regulated by each state independently and that what is happening in one state does not reflect what is happening in an another. That is the reason for state "surveys" to identify specific conditions.

Yardley, you can cite all the worthless studies you want but the real world is that if insurance companies were making so much profit from writing fully insured comprehensive major medical insurance for employer groups and individuals, there would be more than a handfull still doing it. Have you ever risked your own funds to make a profit or just managed other people's money by giving folks advice obtained from your ouiji(sp) board? I suspect the state surveys are not as acurate as the companies PNL statements.

YardleyLabs
10-28-2009, 09:00 AM
Yardley, you can cite all the worthless studies you want but the real world is that if insurance companies were making so much profit from writing fully insured comprehensive major medical insurance for employer groups and individuals, there would be more than a handfull still doing it. Have you ever risked your own funds to make a profit or just managed other people's money by giving folks advice obtained from your ouiji(sp) board? I suspect the state surveys are not as acurate as the companies PNL statements.
If you know anything about the reports from state insurance commissioners, you would also know that they are based on the financial reports submitted as a matter of law by the insurance companies; they are based on 100% of the data and are not sample studies. While a 2-3% profit may sound low, that needs to be viewed in light of the risks assumed. A 17% average return on assets over a ten year period is not bad at all. And yes, I have owned and profitably run businesses with my own money at stake since 1984, employing hundreds of people in the process. I am currently semi-retired, having turned my last business over to my staff, and continue to support myself through my savings and money I earn through what used to be my hobbies.

code3retrievers
10-28-2009, 09:18 AM
So, is 17% obscene as some of your dems have stated?

In my business I shoot for a 15% profit, I must be a capitalist pig on a mission to take advantage of the underprivileged.

YardleyLabs
10-28-2009, 09:33 AM
So, is 17% obscene as some of your dems have stated?

In my business I shoot for a 15% profit, I must be a capitalist pig on a mission to take advantage of the underprivileged.
Did I say anything about obscene? If you follow my posts, you would notice that, from the beginning, I stated that insurance company profits were not a big part of the problem with the exception of certain abusive product lines (which do not include comprehensive group coverage). Profit margins vary by industry and industry structure and can only be judged in the context of that industry. By looking at return on assets, you get some leveling of the playing field and can judge the return based on relative risk. In health insurance, the risk is generally considered to be very low.

code3retrievers
10-28-2009, 12:01 PM
Did I say anything about obscene?

Did I say you. Read it again, it said your Dems and I was referring to the Democratic leadership.