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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MSJohn SpekMark R MassieJenny Kdave Recent comment authors
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MS
Guest
MS

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… Read more »

John Spek
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John Spek

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

J.S.
Guest
J.S.

” .. 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.

Paolo
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Paolo

“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.

Mark R Massie
Guest
Mark R Massie

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,… Read more »

Underwriterguy
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Underwriterguy

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?

J.S.
Guest
J.S.

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.

Mark Spohr
Guest

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”.

Jenny K
Guest
Jenny K

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.

dave
Guest

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.

J.S.
Guest
J.S.

“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.

Paolo
Guest
Paolo

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.

Margalit Gur-Arie
Guest

“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.

Vikram
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Vikram

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… Read more »

Nate
Guest
Nate

“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… Read more »