Ask the Neo-Con, Part X

UPDATE: below

Responding to Thursday's post on comparative health insurance claim denials, an anonymous commenter asks:

I wonder what percentage of total health care spending is accounted for by insurance company costs/profits. I suspect it is very low.

The question may have been prompted by recent assertions by President Obama ("record profits") and Speaker Pelosi ("obscene profits"), and by widespread wailing from lefties demonizing health insurance companies. What's the truth?

• Background on insurance organizations: Traditional insurance firms were "mutual companies," essentially cooperatives where policyholders both pooled risk and had some rights to any surplus. For example, Liberty Mutual and Massachusetts Mutual are "mutualized" companies. Relatedly, Lloyd's of London -- though not itself an insurance company -- once organized pools of "names" who underwrote premiums and shared both risk and reward. For such companies, financial data aren't necessarily public, though various rating organizations assess such companies' financial strengths.
  
  More recently, some insurance companies have "de-mutualized", becoming publicly traded companies so as to improve their access to capital.
  The financial statements of such companies are a matter of public record.
  
  Of course, as I previously have explained, all state insurance commissions have the authority regulate insurance rates.



• Meaning of mutual "profits": For the most part, it makes little sense to assess "profits" of cooperative mutual companies. They may or may not be operated to maximize profits, but instead must accumulate liquid reserves to cover potential future claims. Regarding unlimited liability individual underwriters, it varies by the particular risk pools -- Lloyds famously flirted with bankruptcy in the 1990s, and are transitioning toward limited liability re-insurance.



• Profits of corporate health insurers: There's different ways to assess the profits of de-mutualized health insurance public companies, but under any definition, Obama and other progressive opponents of private insurance clearly are wrong. First, if defined as total revenue minus expenses (including interest), insurance companies set no profit records, as PolitiFact and FactCheck.org confirm. Coyote Blog examined 3rd quarter 2008 data and found margins of between 2.6 and 5.5 percent. And, since then, earnings per share dropped for most health insurers, as publicly reported data confirm:
  
  
  source: August 24th American Medical News
  
  So healthcare profits are under ten billion (around $ 7,000 per capita at purchasing power parity), while total U.S. healthcare expenditures (in 2006) were over $ 2 trillion.
  
  As econ prof Mark Perry shows, profit margins of health care plans average about 3.3 percent, ranking a mere 86th among U.S. industries. Even considering solely Fortune-500 firms, insurers (as a whole, including life, casualty, etc.) are only the 22nd most profitable industry. And, of course, health insurer net profits after taxes are lower still.
  
  Second, one could look at returns on assets. But, reports the Wall Street Journal, they're "pretty modest too":

  According to analysis by FactSet, WellPoint's ROA has averaged 5.8% over the past five years, Aetna's, 4.2%. Those were, remember, supposedly boom years. UnitedHealth was higher, at 9.6%, but fell to 6.4% in 2008. These are reasonable, but hardly spectacular, results. By comparison, Wal-Mart averaged a 9.2% return on its assets and Dell, Inc. 12.4%.

  As swordofdestiny observes:

  Wal-Mart makes as much as about eleven Aetnas and around four Unitedhealth Group, Inc. Puts a bit of perspective on it.

  As Coyote Blog says, "Look out everyone, if this industry is too profitable for this administration, then just about every industry in the country is too profitable."
  
  Third, some lefties and media insist that the proper profit measure is the "medical loss ratio," a comparison between what companies pay-out in health claims and receive in premiums. This ratio supposedly is declining to between 80 and 85 percent, which progressives blame on assertedly excessive executive compensation.
  
  But this ignores taxes and administrative expenses, the later of which has been upped in recent years by government mandates, like privacy rules in the Health Insurance Portability and Accountability Act of 1996. And, in any event, most of the large publicly-traded health insurers show modest improvements in medical loss ratios this year:
  
  
  source: August 24th American Medical News
  
  And even de-mutualized health insurers need a cushion of assets to cover future unanticipated claims, and access to capital in the public markets. This requires both sensible reserves and reasonable investment returns.

Conclusion: Vice President Biden recently conceded he "want[s] insurance companies to make money." Biden may be the only Dem not determined to "gut them like trouts."

Private health insurance company profits averaging 3.3 percent aren't obviously an excessively high percentage of private healthcare spending. Still, Coyote Blog is right that, for progressives, the sole acceptable profit margin is zero. Like maxed-out Medicare, for example, which is nearly bankrupt.

Lefties imagine some magic wand can make universal health insurance cheap--without recognizing that the best approach to cost containment is increased private insurance competition and choice. Confirming that liberals "don't know much" about economics.

MORE:

Even the Associated Press agrees:

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.

Profits barely exceeded 2 percent of revenues in the latest annual measure. This partly explains why the credit ratings of some of the largest insurers were downgraded to negative from stable heading into this year, as investors were warned of a stagnant if not shrinking market for private plans.

MORE & MORE:

An update from econ prof Mark Perry at Carpe Diem.

(via Right Wing News)