We hear a lot these days about the “record profits” of health insurance companies. The Department of Health and Human Services makes this point in announcing new initiatives to oversee “unreasonable” requests for premium increases, spending millions in the process to assist the states in making these evaluations. Insurance company profits are targeted as a major cause of high health insurance premiums.
If you look at the dollar profit of a health insurance company or any large company for that matter you will find a big number, they are big companies after all. However, throwing around a big number is not an accurate measure of profitability.
Let’s take a look at this issue in another way, a way that shows the relative profitability of other large companies. Let’s look at Net Profit Margin (profit margin after taxes). Profit margin is an indicator of a company’s pricing strategies and how well it controls costs. You can’t use it to evaluate the performance of a company in one industry to another industry because of many variables. However, it will show the relative profitability of one organization to another.
Following is a list showing the Net Profit Margins (from MSN Money) of several large companies in the US including consumer products, utilities, fast food, energy, industrial and of course, health insurance.
Net Profit Margin
0.58% (Worst)
3.22%
3.78%
3.83%
3.95%
4.97%
5.01%
5.04%
5.05%
5.26%
5.39%
6.04%
6.97%
8.78%
9.37%
9.38%
12.90%
14.23%
16.26%
20.61% (Best)
When it comes to health insurance companies, they can raise their Net Profit Margin in two ways, increase revenue or lower costs. That means raise premiums or, since the vast majority of costs are medical claims, cut back on the payment of claims – unfairly deny claims as assumed by some people. If you see a health insurance company with a Net Profit Margin way out of line with other companies, you can bet the company is employing one or both of the above strategies.
Did you spot the health companies from the above list? Double check your evaluation by taking a look at the names of the companies in the same order as the above Net Profit Margins.
HealthNet (Worst)
Walgreen
Wal-Mart
Coventry Health Care
General Motors
United Health Care
WellPoint
Home Depot
Amerigroup
Aetna
Ford
Kraft Foods
Cigna
Exxon Mobile
Comcast
General Electric
Verizon
Exelon
Proctor and Gamble
AT&T
McDonalds Corporation (Best)
It would appear that the fast food business is the place to be. Ironic isn’t it considering we are talking about health insurance.
Of course then there is this view from the left – apparently way left: Health Insurance Industry Loves That You Can’t Afford to Use Your Coverage On the other hand, the profit margins for some of these insurers such as Wellpoint include what they earn from administering claims for Medicare. Did you ever wonder why the same company is so liberal in paying claims for the government program and yet manages its claim payments more prudently on the private side? The answer lies on Capital Hill.
Related articles
- Controlling “unreasonable” premium increases – Feds issue new rules (quinnscommentary.com)
- Insurers will have to justify rate increases over 10 percent (dailykos.com)
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