Earlier this week, Congressmen Henry Waxman and Bart Stupak sent letters to 52 health insurers requesting a host of information, including salaries and bonuses of top executives, costs of conferences and retreats, and the margins on the companies' products.
The subheading of the letters might as well have been, "Show us why you can't deal with a government-sponsored public plan," because that's what this witch hunt seems to be about.
That's right -- witch hunt
It's funny how the government seems flabbergasted by companies in a capitalistic society making money during a crisis. They did a similar thing when they hauled in executives from ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), and other big oil companies to answer questions about the supposed gobs of money they were making when oil prices spiked.
I'll help you out, Waxman and Stupak. The answer is, "Yes, insurers make money, but it isn't all that much."
The real reason health-insurance premiums are so high is because medical costs are high. Around $0.82 of every dollar that customers pay goes toward medical costs. If insurers misjudge those costs, they eat the mistake until premiums can reset.
The part that doesn't go to doctors and drugs pays for staff, buildings, advertisements, and the like. By the time you get to the bottom line, there's not a whole lot left. Check out the net income margins for some of the largest health insurers:
|
Company |
2006 |
2007 |
2008 |
|---|---|---|---|
|
UnitedHealth Group (NYSE:UNH) |
5.8% |
6.2% |
3.7% |
|
WellPoint (NYSE:WLP) |
5.4% |
5.5% |
4.1% |
|
Aetna (NYSE:AET) |
6.8% |
6.6% |
4.5% |
|
Cigna |
7.0% |
6.3% |
1.5% |
|
Humana (NYSE:HUM) |
2.3% |
3.3% |
2.2% |
Source: Capital IQ, a division of Standard & Poor's.
So a not-for-profit government program might be able to shave 5% off the price of health insurance, assuming the government can work as efficiently as the private health insurers. But that's debatable, considering the state of the U.S. Post Office compared to UPS and FedEx (NYSE:FDX).
A witch hunt for whiners
Even though health insurers aren't making that much relative to their revenue, I don't actually feel sorry for them, because frankly, their complaints about a public plan seem a bit overdone. I'm not convinced it'll going to cut into their margins all that much.
Health insurers make some of their income by investing customers' premiums in corporate bonds. For instance, nearly 3% of Aetna's revenue over the last four quarters came from interest and dividends.
The company had some capital losses as well -- haven't we all? -- which raises the question: Will the public tolerate losses in a public plan through investment in corporate bonds, or will the plan be stuck funding the government's overspending by buying T-bills? The latter probably won't bring in nearly as much income, reducing some of the savings it'd reap from its nonprofit status.
Health insurers also need to take a cue from George Michael, and have some faith that they'll be able to compete. Innovative programs can reduce medical costs and help drive profits. For instance, Humana's Medicare Advantage case-management program has reduced the number of patients who need to be readmitted to a hospital within 30 days of being discharged, down to 11%-12% from the 20% that traditional Medicare experiences. Assuming such case management is cheaper than having the patient in the hospital, the difference in the costs is pure profit.
Even if health insurers need to charge slightly more than the government-sponsored public plan to make a profit, I'm not sure that's the worst thing in the world. Some seniors in Medicare pay extra to be in Medicare Advantage programs, and I suspect that many Americans would be willing to pay a little more to avoid being in a government-run program.
What do you think? Should insurers be hung out to dry, or has Congress gone too far? Let us know in the comment box below.
