We're Going To Fund Health Care Reform By Cutting the Insurance Company Profits

I am not sure anyone has actually said this, but that has certainly been the implication, right?  Obama & Pelosi spends a lot of time accusing insurance companies of having profits that are too high, so I have to believe his intention is to reap cost savings by cutting into them.

I have blogged about this before, but Carpe Diem also picks up this thread, observing that health insurance companies are #86 on the list of US industries in terms of profit margins, with a ROS of  3.3%.  As Mark Perry points out, this gives them a profit of about $100 per individual policy.  Not really a very promising source of savings, is it?  But it is very scary for any industry that makes more than 3.3% profits, knowing that the Administration thinks they are making too much money and has shown a willingness to slice into profits it thinks to be excessive.

  • Sean Wise

    The real problem here is one of money. With the average insurance policy cost in the $13,000 per year per family range and cost rising at nearly 10% a year, the $100 profit only cover 1 month of increase in health care costs.

  • mark

    One of the real problems is what Sean says. The "average" insurance policy costing $13,000/year. I am a 45 year old man, in reasonable shape. I have not spent $13k in health expenses in my entire life, much less in a single year. My entire family of five uses probably less than $2000 in actual health care costs a year.

    My individual health insurance policy from BCBS costs $176/month with a $1500 deductible.

    My point is, WHO NEEDS HEALTH CARE INSURANCE that costs $13k a year? Are we that big of fools that we allow this to happen to us??? And now apparently will allow the governemnt to FORCE us to buy such coverage????

  • Dr. T

    Our Democratic party politicians have a different definition of profit. Profit is not: income - expenses - (salaries + benefits) - taxes. Profit is: income + government subsidies - government allowed expenses. These politicians believe that the salaries and benefits of workers at private companies should be counted as profits.

    And why shouldn't Democratic party politicians feel this way? The insurance company workers typically aren't in unions, and the insurance executives are paid "too much" (which is defined as anything more than a GS 11 government employee). Non-union workers and executives belong to evil subclasses of humanity, according to those in power today.

  • gn

    Whenever friends and family rail against the costs of health insurance and drugs I remind them that these industries are among the few that still employee large numbers of white-collar workers in the USA. I also ask them to name a single drug developed by a Canadian pharmacutical company just as a snark.

    We need some industry to replace dotcom and real estate as a jobs producer coming out of this recession. My money is on Government and Health Care in all its forms (ties in well with demographics, too).

  • es09

    If the health care insurance companies are not making that much money, but we still end up paying so much more for insurance, where could the money be going? Hmmm.. could it be.. doctors?! I don't see anyone ever blog about how much doctors in US make and compare it to other countries. The comparison has always been about pharma companies, but never doctors.

  • ElamBend

    Warren,
    While listening to a harangue from my lefty uncle about health care and insurance companies, I through that fact out. He was non-plussed...for a moment, but then pretty much admitted that he'd like to see health insurers out of business and replaced by Uncle Sugar anyway.

  • Dave K

    If you look at the Yahoo! Finance page that's linked in the Carpe Diem article,and click on "Health Care Plans", it has them listed under the Health Care sector. The health care sector as a whole has a profit margin of 11.33% but that's bolstered by Drug Manufacturers-Major at 16.7%, Home Health Care and Drug Delivery at 8.9% and Medical Instruments and Supplies at 8.8%. Of the sixteen industries listed under Health Care, half are above 5% and the other half are under 3.5%.

    http://biz.yahoo.com/p/5qpmd.html

  • http://devilish-details.blogspot.com/ Mesa Econoguy

    Econ 101 question: What happens when you tax something?

    Answer: You get less of it.

    Obamalini is taxing wealth creation, medical care delivery, medical care consumers, and medical innovation in his health “plan.”

    Who wants to wager a guess what the outcome will be?

  • Eddie

    I'm still of the opinion that we should all go back to paying significantly less for major medical, and pay real honest-to-goodness money for our checkups and flu shots and the like.

    For some reason, paying a third party to pay for our regular medical expenses is put forth as a savings... as if funding an entire industry as a middleman is a good way to do business.

    Now we learn that the proper solution is for the government to be the middleman. I suppose this is because they're so superlative at efficiency.

  • Ravi

    Hey, at least the companies that make less than 3.3% can stay in business. The first prime minister of India openly declared that profit is a dirty word. And then he and his family ran the country to the ground for the next sixty years with excellent socialist programs. We are getting there, but it may take a while. It won't happen on Obama's time. There will be another crackpot despot who will think even 1% profit is too much and destroy the industry. Let's see how long that day will be delayed. At this point, my only hope is for these changes to be as slow as possible. As for the inevitabilty of freedom and individual liberty being destroyed, I have no doubt.

  • Mark E

    Another way to look at it is insurance profits represent ~1% of total US healthcare spending. Without even debating whether they are "too high", how could anyone really think that even eliminating them could result in a significant reduction in overall health spending?

  • tomw

    Mark E:
    ...how could anyone really think that even eliminating them could result in a significant reduction in overall health spending?

    Are you being facetious? They don't really think that this will reduce any expense, nor will it provide health care to the 45 million or 12 million or whatever the number is who don't currently have health insurance. That is not what this is about.
    This is about the government getting people hooked onto the government teat for life. Eternal Democrat Congress and Executive.
    " no more mortgage to worry about, free gas, ..."

    "get me some of that Obama money" - thousands in Detroit trying to get that free money.

    Cash for Clunkers -- free money!

    This has NOTHING to do with cutting costs.

    tom

  • http://http//www.tinyvital.com/blog John Moore

    I find the use of ROS a bit questionable. Why not ROI or EBITA or something? If you have a business with a low overhead cost per dollar sold, why should it have a high ROS?

    This really is a question. Corporate finance is not my thing.

  • DKN

    tomw is absolutely right, this has nothing to do with costs, profit margins, fairness or what have you. It is about who will define what choices we have, who will decide how we live, and even who will decide how and when we will die. It's about people who have convinced themselves that they can run our lives better than we can, and their quest for the power to enforce their will.

  • spiro

    es09,

    Do you REALLY want to put a cap on Doctors' incomes? Anymore, with specialty training and residency, it takes 12-16 years of training to start medical practice. Now, you want to take away a major incentive (income). Why would any of the "best and brightest" want to enter medicine? If you want mediocre medical care, go ahead, give them mediocre wages.

  • Michael

    Canadian doctors make about 40% of what US doctors make. They have a 3 year wait list for primary care doctors. Getting rid of doctors will cut medical costs but are you willing to pay the human costs?

    I posted over at Carpe Diem:

    Insurance companies are required by the government to hold pretty secured assets. It wouldn't surprise me to find that insurance profits come mostly from their assets.

    This makes the whole public option a joke. The governments assets can be whatever they want. They'll just take them from the people.

  • Dr. T

    Yes, everyone is mad about greedy doctors. Us SOBs make so much money that we should be stoned. Why should we get paid so much just to help care for sick people. Nurses do that and get paid only a fraction of what doctors do.

    Spiro is right. Physicians are among the smartest groups in the world. (Only PhD scientists are smarter.) Doctors than longer than anyone: 4 y college, 4 y medical school, 1 y internship, 2-5 years residency, 1-4 y fellowship. I trained for 14 years and didn't start practicing until I was almost 30. Then we have the student loans to repay: the average debt held by a new intern exceeds $100,000. Physicians who open their own practices or buy into existing practices typically borrow between $250,000 and $1,000,000.

    People aren't angry when their house contractor (with just a high school diploma) makes $500,000 a year, but people are angry when their highly educated physician makes $250,000 a year. The illogic of this irritates me.

  • Michael

    I agree with you Dr. T. I've consulted with single practice doctors for 10 years. For all the crap government puts you guy through, you deserve better.

    I'm not a big fan of housing contractors. Homeowners seem happy to give them the big bucks, but they love to nickle and dime the workers with the skills to build a house.

  • Noumenon

    Every time you make this argument I ask "Why would people bother with profit margins that small? There must be a catch." Since the last time I found the answer, in the comments section at Marginal Revolution: How Profitable Are Insurance Companies?

    Tyler Cowen looked at it basically the same way as you but the comments mostly agreed that profit margins simply aren't a meaningful comparison between industries, especially the insurance industry which is essentially about investing the premiums and doesn't require much invested capital.

    When you look at return on equity between Aetna and Pfizer, they look about the same. Aetna just likes to drag out its low profit margins because it looks better politically. Kind of like a union guy talking about how low his hourly wage is without mentioning that he only has to show up for ten minutes to get paid for the day.

  • Henry Bowman

    Even the AP finally gets around to pointing out these simple facts. Perhaps the state-run media are getting tired of being led around by the nose by the Obama Administration?