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The Truth About Profits: Are Health Plans Really the Villains in Battle to Lower Health Costs?

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October 27, 2010

By: Health Care Cost Expert Gregg Kennerly

As health care costs continue to rise, it´s become even more popular to cast Health Insurers as rapacious villains in the struggle to make health care more affordable to Americans. But what do the facts tell us?

According to Morningstar, Health Insurers in 2009 ranked 87th out of 215 industries ranked in net profit margin, with an average of 3.3%. This compares with some industries at the top of the listings such as #1 Beverages (brewing) with a 25.9% profit margin and #7 Drug Manufacturers at 16.5%. It seems Health Plans are at the bottom of the profit hierarchy in the health sector.

To be sure, health plans are making money, with market share leader United Health Group earning $3.48 billion in 2009 on revenue of $84.27 billion, for a net profit margin of 4.14%. With millions of Americans uninsured and unable to afford health insurance, are these numbers inflammatory to many regulators and citizens? Absolutely. Is it fair to expect health insurers to take on the risks of an uncertain market for a break-even result at best? There are differing opinions.

While President Obama and HHS Secretary Sebelius have made Health Insurers their whipping boy for reform, other typically liberal-leaning outlets have a different view. From the Boston Globe, 11/01/2009, “Hyperbole in the health debate”: “For all the impassioned talk about obscene profits and bodies piling up, health insurance profit margins typically run about 6 per cent of revenue, a return that is anemic compared to other forms of insurance and a broad array of other industries.”

Administrative costs are targeted as out of control and a waste of money in the industry. Where a brewery may have glass bottles or grain as its most costly line item, what do insurance companies do but administer payments? To those outside the insurance industry, it´s not possible to understand the vast array of transactions performed, services rendered, and data collected that goes into making a health care payment. Insurance companies want health care costs reduced, and have developed sophisticated programs to measure the cost, efficiency, and outcomes of care. Even the most cynical would have to admit that paying everything that comes in the door without review or comparison is not a reasonable path to controlling costs.

So what´s the answer? California Democrat Henry Waxman has embarked on a campaign of requesting corporate details of executive pay, perks and junkets to industry meetings. Is this the answer to the nation´s health care woes? I don´t think so. Perhaps Bill Freeza of RealClearPolitics.com expressed it best: “If you took all the profits that all the health insurance companies made in 2009 and used them to pay for medical care in 2010 you would cover the country´s medical bills for … two days. Then what?”

I don´t know- but I know it´s not as simple as mandatory limits on insurance company profits.

Gregg Kennerly is President of Advanced Benefit Strategies of Virginia, LLC. Reach him at (757) 536-4554.

In his career, Gregg has developed specialized expertise in “consumer-driven” and high deductible health plans with HSA and HRA strategies, and sold the first HSA plans issued in Virginia through Assurant Health. He is an expert in analyzing plan design data and has served as account executive for national accounts such as Coca-Cola Enterprises and Tenet HealthCare. Gregg utilizes a strategic approach to establish goals based on each client’s unique culture and competitive environment, and measuring results against jointly established criteria. Gregg Kennerly is a Principal at Advanced Benefit Strategies of Virginia, LLC.
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