The Truth Behind America's Health Insurance Companies - It Hurts
The following post is in the form of a letter written to the editor of The New York Times on 16th August 2009 in response to an op-ed penned by the President, Barack Obama calling for reform of the health care system in the U.S. I have chosen to retain the original letter exactly as it was penned and reproduced here for providing you a sense of how going after the profits of insurance companies is at best, a case of missing the woods for the trees, and at worst, a willful attempt at manipulating and distorting public opinion.
Dear Editor,
This is with reference to the op-ed, Why We Need Health Care Reform by our President, Barack Obama. One of the main culprits in his story are the health insurance companies which he rallies against with one argument after the other. He is either promising that “by making Medicare more efficient, we’ll be able to ensure that more tax dollars go directly to caring for seniors instead of enriching insurance companies” or is proposing more consumer protection which will “finally hold insurance companies accountable enriching insurance companies.” (read more trial lawyers and more million-dollar compensation and damages for “pain and anguish”) For all his grievances about insurance companies, let me spill the inconvenient truth on that. And unfortunately I am not a paid hack of the insurance companies. I am a graduate student in Economics, appalled at how many of the President’s policies have relied on economic calculations that would not pass muster with most serious professional apolitical economists and how he has tried to camouflage his utopian, socialist ideals in the language of professional economics.
As far as health insurance companies are concerned, many of the for-profit ones are publicly listed on one of America’s many stock exchanges. You can look at the websites of any of these insurance companies and check their financial figures for yourself to see whether what the President is saying holds any water or not. But for now, let me do that heavy lifting.
On the question of profitability, one of the standard ways of measuring it for any company or industry is to look at something known as Return on Sales. Return on Sales is basically this - if I sell $100 worth of stuff, and make a total of $4 after I take out all of my expenses, then my Return on Sales is 4%. It’s simple and it’s an easy way of understanding how profitable an industry is. Not surprisingly, this measure varies tremendously from industry to industry. In some industries, such as discount retailing, margins are usually wafer-thin and in the range of around 3%. For example, Wal-Mart, arguably the best run discount retailing operator in the world reported a net profit of $13.4 billion on total sales of $406 billion - that is a profit margin of 3.3%.
(http://walmartstores.com/sites/AnnualReport/2009/docs/fr_statement_income.pdf)
And then on the other end of the spectrum you have some technology companies like Microsoft, Google or Apple which have significantly higher profit margins. For example, take the most innovative of these companies, Apple. In 2008, they made $ 4.8 billion of profits on a revenue of $ 32.5 billion – thus their Return on Sales stood at approximately 15%. So in a very crude sense, what you have above is a range of profitability of industries, varying between approximately 3% on one hand (ignoring car companies & airlines for now, whose profitability is even lower) to around 15 - 20% for some tech companies.
Where do health insurance companies fall on that spectrum? Closer to the 3% range than to the 15-20% range. I take the three largest for-profit publicly listed health insurance companies, United Health Care, Well Point and Aetna, which are also among the better-run ones. United, in particular, has a reputation of being among the most well-managed companies out there not just in the health care space but even more generally. So let us look first at what United Health Care, the largest insurer in the U.S made in (obscene) profits (Do I hear someone sayings windfall profit tax?). For 2008, United made a total profit of around $2.9 billion on a revenue of $82 billion - that is a measly profit margin of 3.6%. (http://www.unitedhealthgroup.com/invest/2008/UNH_2008_AR_FINAL.pdf)
Let’s look next at Aetna. In 2008, Aetna made a total of $1.4 billion in profits on a total revenue base of $31 billion - a profit margin of 4.5%. (http://www.aetna.com/2008annualreport/financial.html)
And finally I look at WellPoint, another very large insurer, which claims to cover 1 out of every 9 Americans with their plans. In 2008, WellPoint made a total of less than $2.5 billion in profits on a total revenue base of $61.3 billion, a profit margin of 4.1% - right in between the profit margins of Aetna and United Health Care.
(http://library.corporate-ir.net/library/13/130/130104/items/330165/E86BF009-7E78-41AE-A12A-02C69ED8E3B6_Wellpoint_08_Summary_AR.pdf)
So that’s where we stand in terms of profitability; the best-run and largest health insurers in the United States made less than $5 in profits for every $100 of revenues that they get, hardly staggering with respect to any reasonable yardstick of comparison.
So finally let us push this thought exercise a step further. Let's set the profits of the insurance companies (assuming that is what President Obama wants) to zero. Add the profits of UHC, WellPoint & Aetna. Those add up to $ 6.8 billion. Estimates of their market shares vary (depending on which population group you are talking of) but let’s put it at 30% of the private health insurance market between these three, a number which is almost certainly downward biased. So if these three companies with say, 30% of the market between them earn a total profit of $6.8 billion, then as a rough first order approximation, if you were to take away ALL the profits of EVERY SINGLE for-profit insurer in the United States against which the President likes to rally against, we would get around $6.8/ 0.3 or $22 billion of savings annually. Now I don't know why anyone would choose to stay in business if you set their profit margin to zero (unless, of course, you forced them at the point of a gun) but even if you did you would get no more than $25 billion of savings annually. And now compare these very modest numbers to the cost numbers that are being bandied around for the legislation (which needless to say runs into several hundreds of billions of dollars) and you will see why the President’s numbers don’t add up. He probably knows all of this or at the very least, his illustrious economic team of Larry Summers and Christina Romer do, yet I am appalled that the administration continues to talk about health insurance profits, as if they were the culprit behind all of America’s health care problems. I just wish that they (and you, yes you, the liberal editorial board of The New York Times) would stop deluding the American public and tell us about the hard and painful choices that have to be made to slow the rising costs of health care.
I have tried to keep my own personal opinions out of all of this and adopted an attitude of just the facts, ma'am no politics here. And you can choose to do so as well and look up the sites of these insurance companies yourself and check every single number that I have provided. But I am afraid if you do so, you will realize how off the President’s numbers are. But wait, you are The New York Times. You already know that, it is just that you don’t want to share that with your audience and are happy to have them worked up about “obscene profits of insurance companies.”
Sincerely,
A disillusioned economist and a disgruntled reader of The New York Times,
Sutirtha Bagchi
(Websites: http://sitemaker.umich.edu/sbagchi/home & http://alonelycapitalist.blogspot.com/)
Dear Editor,
This is with reference to the op-ed, Why We Need Health Care Reform by our President, Barack Obama. One of the main culprits in his story are the health insurance companies which he rallies against with one argument after the other. He is either promising that “by making Medicare more efficient, we’ll be able to ensure that more tax dollars go directly to caring for seniors instead of enriching insurance companies” or is proposing more consumer protection which will “finally hold insurance companies accountable enriching insurance companies.” (read more trial lawyers and more million-dollar compensation and damages for “pain and anguish”) For all his grievances about insurance companies, let me spill the inconvenient truth on that. And unfortunately I am not a paid hack of the insurance companies. I am a graduate student in Economics, appalled at how many of the President’s policies have relied on economic calculations that would not pass muster with most serious professional apolitical economists and how he has tried to camouflage his utopian, socialist ideals in the language of professional economics.
As far as health insurance companies are concerned, many of the for-profit ones are publicly listed on one of America’s many stock exchanges. You can look at the websites of any of these insurance companies and check their financial figures for yourself to see whether what the President is saying holds any water or not. But for now, let me do that heavy lifting.
On the question of profitability, one of the standard ways of measuring it for any company or industry is to look at something known as Return on Sales. Return on Sales is basically this - if I sell $100 worth of stuff, and make a total of $4 after I take out all of my expenses, then my Return on Sales is 4%. It’s simple and it’s an easy way of understanding how profitable an industry is. Not surprisingly, this measure varies tremendously from industry to industry. In some industries, such as discount retailing, margins are usually wafer-thin and in the range of around 3%. For example, Wal-Mart, arguably the best run discount retailing operator in the world reported a net profit of $13.4 billion on total sales of $406 billion - that is a profit margin of 3.3%.
(http://walmartstores.com/sites/AnnualReport/2009/docs/fr_statement_income.pdf)
And then on the other end of the spectrum you have some technology companies like Microsoft, Google or Apple which have significantly higher profit margins. For example, take the most innovative of these companies, Apple. In 2008, they made $ 4.8 billion of profits on a revenue of $ 32.5 billion – thus their Return on Sales stood at approximately 15%. So in a very crude sense, what you have above is a range of profitability of industries, varying between approximately 3% on one hand (ignoring car companies & airlines for now, whose profitability is even lower) to around 15 - 20% for some tech companies.
Where do health insurance companies fall on that spectrum? Closer to the 3% range than to the 15-20% range. I take the three largest for-profit publicly listed health insurance companies, United Health Care, Well Point and Aetna, which are also among the better-run ones. United, in particular, has a reputation of being among the most well-managed companies out there not just in the health care space but even more generally. So let us look first at what United Health Care, the largest insurer in the U.S made in (obscene) profits (Do I hear someone sayings windfall profit tax?). For 2008, United made a total profit of around $2.9 billion on a revenue of $82 billion - that is a measly profit margin of 3.6%. (http://www.unitedhealthgroup.com/invest/2008/UNH_2008_AR_FINAL.pdf)
Let’s look next at Aetna. In 2008, Aetna made a total of $1.4 billion in profits on a total revenue base of $31 billion - a profit margin of 4.5%. (http://www.aetna.com/2008annualreport/financial.html)
And finally I look at WellPoint, another very large insurer, which claims to cover 1 out of every 9 Americans with their plans. In 2008, WellPoint made a total of less than $2.5 billion in profits on a total revenue base of $61.3 billion, a profit margin of 4.1% - right in between the profit margins of Aetna and United Health Care.
(http://library.corporate-ir.net/library/13/130/130104/items/330165/E86BF009-7E78-41AE-A12A-02C69ED8E3B6_Wellpoint_08_Summary_AR.pdf)
So that’s where we stand in terms of profitability; the best-run and largest health insurers in the United States made less than $5 in profits for every $100 of revenues that they get, hardly staggering with respect to any reasonable yardstick of comparison.
So finally let us push this thought exercise a step further. Let's set the profits of the insurance companies (assuming that is what President Obama wants) to zero. Add the profits of UHC, WellPoint & Aetna. Those add up to $ 6.8 billion. Estimates of their market shares vary (depending on which population group you are talking of) but let’s put it at 30% of the private health insurance market between these three, a number which is almost certainly downward biased. So if these three companies with say, 30% of the market between them earn a total profit of $6.8 billion, then as a rough first order approximation, if you were to take away ALL the profits of EVERY SINGLE for-profit insurer in the United States against which the President likes to rally against, we would get around $6.8/ 0.3 or $22 billion of savings annually. Now I don't know why anyone would choose to stay in business if you set their profit margin to zero (unless, of course, you forced them at the point of a gun) but even if you did you would get no more than $25 billion of savings annually. And now compare these very modest numbers to the cost numbers that are being bandied around for the legislation (which needless to say runs into several hundreds of billions of dollars) and you will see why the President’s numbers don’t add up. He probably knows all of this or at the very least, his illustrious economic team of Larry Summers and Christina Romer do, yet I am appalled that the administration continues to talk about health insurance profits, as if they were the culprit behind all of America’s health care problems. I just wish that they (and you, yes you, the liberal editorial board of The New York Times) would stop deluding the American public and tell us about the hard and painful choices that have to be made to slow the rising costs of health care.
I have tried to keep my own personal opinions out of all of this and adopted an attitude of just the facts, ma'am no politics here. And you can choose to do so as well and look up the sites of these insurance companies yourself and check every single number that I have provided. But I am afraid if you do so, you will realize how off the President’s numbers are. But wait, you are The New York Times. You already know that, it is just that you don’t want to share that with your audience and are happy to have them worked up about “obscene profits of insurance companies.”
Sincerely,
A disillusioned economist and a disgruntled reader of The New York Times,
Sutirtha Bagchi
(Websites: http://sitemaker.umich.edu/sbagchi/home & http://alonelycapitalist.blogspot.com/)
Labels: Barack Obama, health care debate, health insurance, insurance, obscene profits
posted by sutirthabagchi | 7:23 AM
2 Comments:
I think that in the garb of saving America(and world's) economies there is a conscious effort from the liberals to again go back to socialism (sans the name)...
Your demonstration of health insurance companies and how they are being targetted,,, adds to that point.
Kepp blogging!
Thanks for the comment Gaurav. Yes I completely agree that is what is precisely being attempted by the left in the U.S., the freest market economy in the Western hemisphere. However there are limits to how much they can stretch their mandate and the losses in the gubernatorial elections in Virginia and New Jersey suggests the pitfalls of pushing too hard on their leftist agenda.
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