OP-ED

Profit-seeking Health Insurers Seek Profits

Healthcare reform becomes official this week, as many of the provisions of the legislation kick in. One provision requires insurers to accept children with preexisting conditions while capping what they can charge, undoing a standard industry practice. Several insurers have indicated that they will stop selling child-only policies. Industry officials are having a field day criticizing insurance industry greed.

Maybe these officials haven’t noticed, but insurers are greedy and there is nothing anyone in the Obama administration can do about it. Maybe it needs repeating. Insurers are greedy, have always been greedy, and always will be greedy. So are all investor-owned companies. People don’t invest in health insurance companies (or any other investor-owned companies) for charity. They invest in them to make money. (Investors tend to be greedy too, and that includes the pension funds that most working Americans rely upon for their comfortable retirements.)

Greed lends a certain degree of predictability to policy making. If the government requires a company to alter a product in such a way that it cannot make money selling it, then the company will refuse to sell that product. Usually our legislators have enough wisdom to understand that they cannot banish greed, but not this time. Didn’t anyone tell President Obama that insurers have relied on preexisting condition exclusions to make child-only policies profitable? (A disproportionate percentage of individuals who seek child-only policies do so because of preexisting conditions and this appears to be a far worse problem in the child-only insurance market than in the adult market.) If the government bans these exclusions, insurers will naturally stop selling the policies. Why is anyone shocked when managers do the bidding of their owners?

By choosing to heavily regulate the insurance market, President Obama has shown the same policy ambivalence that seems to mark his entire administration. Here he wants to sustain privately financed healthcare and simultaneously achieve the end results of government financed healthcare. He can’t have it both ways. If he really wanted a privately financed system, he should have done so with the least amount of intervention and let the profit motive work for the greater good, as it does in most markets. Economists have shown how to do this: End the tax subsidy, provide financial incentives for insurers to cover the very ill (risk adjustments? separate high risk pools?) and accept that some individuals will still fall through the cracks and have to rely on safety net providers. If he really wanted the end results of government financed healthcare, then he should have jettisoned the market-based insurance system altogether. We know how to do this to, by following Canada’s lead. Socialized medicine is not without its benefits, and perhaps markets don’t have all that much to offer in healthcare anyway. (That is a debate for another blog, or one hundred blogs.) Pick a side! Healthcare reform is devilish, but the devil you know is better than the one you don’t.

There is, of course, a far more cynical explanation for what is going on. Perhaps President Obama really does prefer socialized medicine, but realizes that he has neither legislative support nor the support of voters. (I doubt I am the first to offer this conjecture.) So he gives us a plan that is sure to fail and lays the blame at the feet of private insurers. Heck, most Americans rank private insurers right down there with tobacco executives, so this populist approach could have traction. After Obama gets done thrashing insurers over these child-only policies, Americans might further lower their opinion of insurers, ranking them right alongside Congress.

David Dranove is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including The Economic Evolution of American Healthcare and Code Red. He has a Ph.D. in Economics from Stanford University.

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20 replies »

  1. Here is my own story on profits.
    I was a Blue Shield California customer from December 1st, 2005 until December 31st, 2009. I am age 45, married, with at the time a 10-yr old daughter. In that period, I paid premiums of $79,113 to Blue Shield for their PPO plan. I had two incidents requiring medical care – I was hit by a car and had injuries to my shoulder and a broken neck. The should injury required a tendon reattachment and pin installation (fracture and separation) and the neck injury resulted in 7 damaged vertabrae. The total of the bills related to this was $248,000. Of this, Blue Shield ‘allowed’ $17,915 in expenses. From this amount, I was required to pay $15,202, with Blue Shield paying $2785. However, the only neurosurgeon capable of fixing my neck would not accept the Blue Shield plan, as he said the hardware alone was $12,000 and Blue Shield was expecting him to fuse my entire cervical region of the neck (rendering full disability and thus making the amount recoverable from Medicare through the disability act.

    He refused to fuse my neck and installed the hardware. I am happy to report that, 3 years later, I am 100% functional, athletic in happy. I am also bankrupt, having lost absolutely every possession (home, car, savings, personal effects) to pay bills.

    Blues Shield in the end, took in $79,000, paid out $2,700, a net profit to them of $76,300, or a staggering 97% profit margin.

    My doctors in the end recovered $870 for three surgeries from my insurer, plus a total of about $29,000 from me (prior to my ultimate bankruptcy).

    Someone tell me how this system is ‘working’. If this is the good part, God help us if something government run is the bad, as if it got worse they should just execute anyone with something more serious than a cold.

  2. sorry folks – the profit margin for health insurance is 3 – 5%
    there are almost 100 industries that do it better
    as to the raw numbers – there are 300 million people in this country, and almost 250 million are insured
    assume:
    10.00 profit per month on a 500 per month policy is 120.00 profit per insured per year
    x 250 million people
    = 30 billion dollars
    and some people are so slow they forget or never grasp that those same companies also earn a part of the profit from overseas insurance
    or didn’t you realize that people in england also buy coverage from united health care

  3. ” .. It has had the authority since 1789, and first used it in 1790.”
    Yeah — and thanks to Barry the Incompetent, this will be in the courts for the next 20 years.
    Great job, Barry, Pelosi and Reid.

  4. “Since when does the federal government have the authority to regulate how a publically or for that matter privately owned business chooses to operate.”
    It has had the authority since 1789, and first used it in 1790.

  5. I can envision legal action taken by insurance carriers to refute these legislative mandates. Since when does the federal government have the authority to regulate how a publically or for that matter privately owned business chooses to operate. Oh wait a minute, this administration has thrown precedent and legal contracts out the window in an effort to push through its liberal (socialistic) agenda…Just ask the bondholders at GM and Chrysler. The Supreme Court will eventually be forced to hear torts from insurance companies and states, as they attempt to right these unjustified infringements on their profitability. Remember that many 401ks, pensions and individual investors are shareholders of these companies, making them accountable for profitable returns on their business endeavors

  6. Notice that Mark did not address my question. The only measure of degree in profits is margin. Absolute numbers tell you nothing. This is the same faulty logic that castigates oil companies. Are the profits in auto manufacture (in a profitable year) obscene? How about Big Pharma? Grocery stores? Steel manufacturers? How can you compare if you don’t know the margin; i.e. profit divided by revenue?

  7. REALLY?
    ” .. The five largest US health insurance companies set new profit records in 2009 ..”
    Uh ..
    ” .. St. Dr. Berwick, who got multi-million-dollar paydays? And has LIFETIME golden medical insurance? No waiting lines for St. Berwick! And don’t forget now, government employees make 50% MORE than private-sector peers ..”
    Looks like a lot of MDs and others are profiting from OweBamaCare.

  8. Sorry for the late response to “underwriterguy” but I have been traveling and this is something that he could have Googled…
    Here are just a few references from the first page of results from a Google search for “Profits of US Health Insurance Companies”.

  9. Profit-seeking entities are greedy – no shocker there. Take the profit out of health care and the system would perform a lot more efficiently…IMHO. It doesn’t have to be government-run – just not-for-profit.

  10. I would like to see you start a health insurance company and show us how cheap you could offer medical coverage. Why rates have gone up is only obvious.

  11. “And, no, greed is still not good.”
    Really? Does that include St. Dr. Berwick, who got multi-million-dollar paydays?
    And has LIFETIME golden medical insurance? No waiting lines for St. Berwick!
    And don’t forget now, government employees make 50% MORE than private-sector peers.
    Gimme a freakin’ break. So tired of this EuroSocialist BS, Nov. 2 can’t arrive fast enough.
    As for this BS —
    ” .. Even the GOP “Pledge to America” unveiled today insists that insurance companies will be barred from excluding pre-existing conditions or imposing annual/lifetime caps.”
    Sure — that’s why my medical insurance bill just went up 10%. Duh.

  12. The era of pre-existent conditions is coming to an end. Even the GOP “Pledge to America” unveiled today insists that insurance companies will be barred from excluding pre-existing conditions or imposing annual/lifetime caps.

  13. “Maybe if we got rid of our poor and minorities we could have their level of success?”
    Exactly. Let’s figure out a way for poverty not to be an acceptable byproduct of the American Dream and I bet all sorts of health care numbers will improve dramatically.

  14. Dear Dave- by current trajectory insurers will be reduced to status of public utilities. That could be precursor to public plan.
    Nate- define failure and sucess in context of Medicare.
    I hope you aren’t doing fox reporting putting camera on blights and extrapolating to correlate with healthcare policies as per convenience. Perhaps you know of WHO and their ratings of national healths. You don’t need to look beyond end results. You might say, minority skew ratings. The truth is most minority don’t even get counted in these surveys. You know how majority gets exaggerated presence in votes. Secondly health results of one minority group makes up for other.
    And yes, wealth doesn’t make you healthier. It might give you appearance of being healthy (tip- wear white tight dress, hold orange in hand, shine teeth white and behold you are healthy).

  15. “All insurers must sell a standard benefit package to anyone who applies. Everyone must buy this standard package. Hospital, doctor, lab, etc. charges are tightly controlled which holds down costs. The supply of doctors and hospitals is also controlled.”
    Mark if this works so well why is Medicare such a failure? You described Medicare exactly and we have polar results. I think that is pretty clear proof it is not the system that is successful over there but something else. And their system is not as successful as people like to believe. Switzerland is the new Englad after it came to light how bad it was which was the new Canada after it came to light how bad it was. 12 months from now after some investigation and reporting and Switzerland won’t be any better then us.
    Since the system is the exact same that leads me to beleive it is the input? Maybe if we got rid of our poor and minorities we could have their level of success?

  16. If anyone thought that insurers could sell child-only policies to sick children, without a corresponding influx of healthy children to help pay for them, they clearly don’t understand economics. I don’t know why critics slam insurers for responding to the incentives given to them and the behaviors of their customers/potential customers — in particular, the desire of high cost users to buy and lower cost ones to not buy in order to avoid subsidizing the high cost ones. The health insurance market for many years was essentially community rated, but that broke down when purchasers started to opt for cheaper rates offered by companies who marketed and priced more selectively. We have met the enemy and it is us…
    I’m reading Dr. Dranove’s use of “greed” as being used in an ironic sort of way, as it seems intentionally inflammatory. Greed in this sense is the basis of capitalism, and I shudder to think many people in this country would prefer another economic system.
    Fix the incentives to reward the desired behavior (which, I have to say, I don’t think the new law will do) and stop all the name-calling!

  17. Would Mark Spohr identify the pre-tax profit margins of any of the national investor owned health insurance companies, please. Your readers would probably benefit from what defines “obscene.” Of course, the shareholders only have access to the after tax margins once Federal corporate income taxes are paid.

  18. Professor Dranove: you’re right about the naivete of ‘going after profits’. But this is politics and going after profits is a popular say (it’s a bit like what your favorite political party does when it calls any form of regulation or redistribution ‘socialism’).
    On a less substantial note, you’d be a more effective writer if you spent some time removing the need to slam the Obama Admin when you write “…President Obama has shown the same policy ambivalence that seems to mark his entire administration.”. It’s not that Obama, Inc shouldn’t be criticized, it’s that you come off as a middle-brow policy analyst at the AEI when you write like that.
    Either stick to writing academic papers, or take your simple partisan politics to the AEI blog. If you come here, be more thoughtful.

  19. Switzerland has a heavily regulated private insurance market and it works very well. All insurers must sell a standard benefit package to anyone who applies. Everyone must buy this standard package. Hospital, doctor, lab, etc. charges are tightly controlled which holds down costs. The supply of doctors and hospitals is also controlled.
    Insurance companies compete and make money by offering various “add-on” policies.
    Health care in Switzerland is higher quality and costs less than in the US.
    Regulation can be done right and can result in universal care at a reasonable cost without “socialized medicine”. However, you need to accept real regulation and that is anathema to the health industry who enjoy obscene profits at our expense.

  20. Fair profits.
    If you cannot make a fair profit in a regulated market without hurting children, then I am pretty sure someone else can and it is time for you to close up shop.
    And, no, greed is still not good.

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