Summary: Today we scrutinize health insurer profit margins. Magically, a modest apparent margin of 4.5% reveals itself upon closer inspection to be a ginormous 30%. Let’s call it what it is: excessive and extortionate.
Medicare Advantage Delivers Better Care and Saves Money: A Response to Gilfillan and Berwick
Health Affairs Forefront
Jan 7, 2022
By George C. Halvorson
We can argue about whether 4.5 percent profit is a good number—but it’s clearly inaccurate to say that it is an “extraordinary number,” as Gilfillan and Berwick contend. Most businesses in most industries would see their stock prices dropping with only 4.5 percent profits.
The Medicare Advantage program: Status report
The most recent data available, from 2019, show that MA plans reported margins that averaged 4.5 percent.
Comment by: Jim Kahn
We read that health insurer annual profits are 4.5%. Less than many other industries, like pharmaceuticals, says Halvorson. A fair return, right?
Wrong. Real profits – net earnings divided by money invested – are 30%. Why? Because health insurers put so little money on the line.
A simple example illustrates.
$1000 spent for a health insurance policy results in:
$850 for medical care (known as the “medical loss”). This is money received as premiums and paid as reimbursements. No upfront investment required by the insurer: no cash outlays, no supplies, no manufacturing, nothing. Indeed, no real risk. Just hold the money a while, let it earn interest, and then pay it out.
$150 is the insurer portion:
- $105 covers actual costs – product design, marketing, sales, contracts, authorizations, denials, payments, dispute resolution, etc. This is the cost of doing business, by staff and contractors. It’s the investment required.
- The remaining $45 is profit.
So, profit = $45 / $150 = 30%.
Or, if you prefer, a yield of $45 on an actual outlay of $105, or 43% return on investment.
Is that a fair profit margin? I think not.
Single payer would, of course, have no private insurers extracting these massive profits from the health care budget using their life-threatening tactic of restricting access to care. Any wonder that they oppose single payer?
(p.s. more on the Halvorson blog in future)