Eliminate all health insurance profits, and what’s left?

Those who advocate government takeover of health care and the elimination of private insurance cite the “wasteful overhead” and “high profits” of health insurance companies.

There’s a lot in this argument that doesn’t make sense. For one, most companies that are trying to earn a profit seek to eliminate as much waste and overhead as possible. Competitive markets force them to do so.

It’s puzzling to me that those who rail against greed don’t acknowledge that it is a powerful motive for efficiency and cost reduction.

While the health insurance market isn’t as competitive as it could be, due to tight regulation by the states, it still exhibits some characteristics of a market. If we would eliminate the practice of nearly all health insurance being purchased by employers, the market would be even more competitive.

The weakest argument by those who advocate for government takeover is the high profits argument. Reporting in the Wall Street Journal indicates that profits in the health insurance industry are quite low.

“For every premium dollar that they take in, about 83 cents goes out in medical costs — doctors, hospitals, and drugs,” says Carl McDonald, health insurance analyst at Oppenheimer & Co. The rest is spent on overhead. Net income comes to just a few cents per dollar of premiums.

Consider WellPoint, the biggest private health insurer on Wall Street, which has about 35 million customers nationwide. Last year, it paid out 83.6% of revenues in expenses. Net, after-tax income as a percentage of total revenue came to a princely 4.1%.

In other words, simply eliminating profits would only allow the public option to undercut the private sector by 4% or so.

So much for profits being the cause of the high cost of health care.

Keep in mind that in free, competitive markets companies can earn profits only when they satisfy customers, and do that efficiently. For a health insurance company, that would mean paying the claims it has agreed to insure at the lowest possible premium cost to its customers.

The fact that so much insurance is bought by employers instead of the ultimate customers of the policies means that we don’t benefit from innovation and competition in this market.

For example, one legitimate concern is that if someone is insured through their job and they become sick for a long period, they’re probably going to lose their job and their insurance. This would be at the same time they’re trying to recover from an expensive and debilitating illness.

In the life insurance industry, policies may have an optional feature called “waiver of premium” or something like that. Under this provision, if an insured person isn’t able to pay their premiums for a covered reason, the policy remains in force.

Do health insurance policies have this feature? And if so, does my employer offer this?

This type of innovation is present in the life insurance market because it is relatively lightly regulated, and most people buy their own life insurance rather than relying on someone else to buy it for them.

We can also look to the automobile insurance market for examples of innovation that aren’t present in the health insurance market.

8 Comments

  • Don’t just eliminate the profits, eliminate the for-profit health insurance companies all together.

    In health care, the for-profit insurance companies are unnecessary middlemen between patients and doctors. Those who advocate government takeover of the payment for health care are for the elimination the private insurance companies altogether, not just their profits. Medicine can be profitable for the private (non-governmental) health care providers like doctors and hospitals. No problem…but why defend the parasitic health insurance companies in the health care picture? They are a drain and because of their greed are an inherent inefficiency on the health care system.

  • i am getting a doubt if in this policies if we choose any one which offer a good and best among other it will give their full efforts if any thing happen to us

  • Thomas Witt -

    The way a manufacturer cuts costs is to improve productivity, or find cheaper suppliers, or find cheaper labor, or cheapen the manufacturing cost of the widget being sold (bigger runs, or lower quality). If widget quality is lowered too far, customers stop buying and turn to a competitor.

    The biggest way a health insurance company cuts costs is by denying and/or canceling coverage for their subscribers, by denying certain procedures, and by paying providers less than the provider charges. The incentives in the health care insurance industry are all backwards – the most profitable insurers are the ones who pay out the smallest and fewest claims. It’s almost impossible to change to a competitor’s plan, as most plans are offered through employers, and the companies who can operate in any given state are limited by an artificial, government-run cartel. If you *do* manage to change companies because you’ve been screwed by your current one, beware! “Pre-existing condition” rules kick in, and guess what? No coverage on whatever illness or injury is determined to be “pre-existing.” You’re screwed, and you have little to no recourse to anything but bankruptcy or worse.

  • The argument that non-profit or public health care providers will, as Orrin Hatch screeches “destroy the private insurance industry,” is alarmist and absolutely unfounded. A single example, among many, proves in fact, that the opposite is true: in Germany (where 90% choose non-profit healthcare), the largest insurer, Allianz, reported this to the Financial Times — “Profits from life and health insurance rose 41 per cent, unusually higher than the operating profits from property and casualty insurance. Mr Diekmann highlighted the double-digit growth in some of its biggest markets, including Germany and Italy.” And that report is consistent with other quarters. The supplemental insurance Allianz supplies in Germany is much more profitable than any form of complete coverage.

  • Bob Palin -

    Most Americans are accustomed to having free or relatively inexpensive health insurance from employment. As a result, they do not have a clue about the problems incurred by people who have no insurance, no health care, or high premiums, co-pays, deductions and other limitations, denials of service, higher retail costs and so forth.

    Many employers simply raise their costs of doing business to provide free or low cost insurance to employees and retirees even when a company folds or is shut down by relying on the aid of tax payers. So the country is grossly sub divided into multiple stratified layers of persons many of whom have perpetual access to health care on down to millions without access to real health care.

    Many people get free meds, some get NONE. Many have coverage at any location, others have limited services in localized areas. Many pay significant portions of their income for coverage, others pay little or nothing.

    Too many people are denied health service, medications or other services by insurers who can only make profits by denial of access or service. The system only seems to work if you are young, healthy, extremely ill, rich or poor. Middle Americans, not protected by employers or unions, are going to suffer by living stressful lives trying to get along in this cockeyed system.

    It’s time to change the role of profiteering insurance companies in metering out health care!

  • InsuranceDenied -

    American life expectancy is rated 42 just behind Bosnia and Fairness the rating of equal access to affordable quality care the US is rated at 54 just below Bangladesh.

    We need to stop the insurance companies from buying our politicians. They spent $86 million of your premium dollars to discredit the healthcare reform movement.

    I highly recommend reading “Deadly Spin” by Wendel Potter, former head of PR at CIGNA Insurance for the real story on what is going on in with American healthcare.

  • Anonymous Mike -

    Hi

    One thing that I believe would help the US medical system is to legislate pricing for the export market. A few years ago, you could purchase drugs from Canada substantially cheaper than you could buy locally. American Medical companies should charge the same price for drugs no matter where they are sold. If the Canadians don’t like it…. Guess what they can do?

    The same “problem” exists here. I could buy a week’s worth of certain drugs for $250.00, but I could purchase a 90 day supply for $30.00. Both purchases were part of an aerospace company’s insurance plan. Does that make any sense?

    Mike

    Later

    Mike

  • lost but not blind -

    Here in South America, where I have to be for a while, pills are much, much less expensive. So much less that the cost is basically pennies for a dose. And it is not “socialized” medicine, it is just regulated capitalism. You cannot charge as crazily as in the US because you will have a revolution. Maybe that’s what it is needed. You need to get rid of the middle man. The middle (and totally useless for that matter) man is a health insurance company. Now TV programs told us that the GOP is fighting against the “mandate” to have an insurance, I didn’t see them fighting against the mandates of: house insurance, car insurance, etc. They just fighting for their obscene profits… obtained with human being lives. If you can have a dose of Celebrex here for 30 cents, a doctor still can go to your house for 40 dollars, and a hysterectomy for 7000 in a private clinic in another part of the world, means that Americans are victims of regional capitalism at its best.

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