By John Ballard
Due diligence is not all it's cracked up to be. Sometimes it's a bitch. I've been looking for the villains of health care inflation for months and thought there were two: Big Insurance and Big Pharmaceuticals. Turns out I was only half right. Blaming the insurance people for higher costs is like blaming the food business for spikes in the prices of lettuce or coffee. Insurance is in the business of managing risks, not creating them. And as every schoolboy knows they don't sell security or safety; all they really sell is peace of mind. (As much as you can afford, of course. Just as when you buy a new automobile.)
Maggie Mahar points to Rick Newman's piece last week in UN News, Why Health Insurers Make Lousy Villains.
This informative article illustrates why investigative journalism is important, as opposed to opinion journalism that so frequently contaminates political discussions. Newman has the same dog in the fight as all the rest of us. He doesn't pay the rent working for insurance or health care. His aim is the same as any other good citizen, look closely at a public discussion, figure out what makes sense and write about what he discovered.
When he took a closer look at health insurance, this is what he found.
Overall, the profit margin for health insurance companies was a modest 3.4 percent over the past year, according to data provided by Morningstar. That ranks 87th out of 215 industries and slightly above the median of 2.2 percent. By this measure, the most profitable industry over the past year has been beverages, with a 25.9 percent profit margin. Right behind that were healthcare real-estate trusts (firms that are basically the landlords for hospitals and healthcare facilities) and application-software (think Windows). The worst performer was copper, with a profit margin of minus 56.6 percent.If you're wondering about Exxon, with its history of gargantuan profits, its profit margin was 9 percent over the past 12 months, according to the research firm Capital IQ. The average for the oil and gas industry overall was 10.2 percent, three times the margin in the health insurance industry. And that's nothing compared with high-fliers like Google�which had a 20.6 percent margin�and Microsoft, at 24.9 percent.
Profit margins basically reflect the percentage of revenue left over after paying salaries, expenses, taxes and lots of other things. So it's possible for firms to pay their executives a lot and still have a low profit margin. That's why Merrill Lynch, as an example, was able to pay huge bonuses to some employees while the company itself lost epic amounts of money.
Government interrogators are unlikely to find abuses on that scale among health insurers. While the rest of the economy has collapsed, most parts of the healthcare sector have remained reasonably stable. So odds are that any bonuses paid at least went out of profitable firms. With profits in many other industries depressed, health insurance profit margins probably rank higher than they normally would, compared with other industries. And a number of health insurance organizations, such as Kaiser and the Blue Cross plans, are nonprofits. They can still pay high salaries, but since there's no stock or stock options, there are fewer ways for big shots to earn lavish bonuses.
Among the large, for-profit health insurers, profit margins line up with the industry as a whole. United Health Group, the biggest health insurer, had a 4.1 percent profit margin over the past 12 months. Well Point, the next biggest, had a 4 percent profit margin. Aetna, Cigna, and Humana came in below that.
That's enough of that. The further I read the more embarrassed I got.I take back all those nasty things a little of what I said about insurance. I stand corrected.
But here's where it gets interesting.
Health insurers turn out to be underperformers compared with the other
parts of the healthcare sector. Pharmaceutical companies have a profit
margin of 16.4 percent�seventh highest of the 215 industries that
Morningstar tracks. Others segments of healthcare with margins well
above the median include healthcare information (9.4 percent), home
healthcare firms (8.5 percent), medical labs (8.2 percent), and generic
drugmakers (6.5 percent).The big money, in other words, isn't in the insurance industry. If it's anywhere, it's in the pharmaceutical industry. But the Obamanauts appear to have reached a kind of d�nte with Big Pharma in exchange for that industry's tepid support for some kind of reform. So Obama and his foot soldiers need to look elsewhere for black hats.
To give a clearer picture of which healthcare firms are earning the most, I've compiled some data from Capital IQ showing net profit margins over the past 12 months for a number of well-known companies. The following list includes the three largest firms in each of five different sectors: biotechnology, drug manufacturers, healthcare plans, healthcare services, and medical equipment. Some of these numbers are sure to be off-putting to Americans who are making sacrifices to pay for healthcare or can't afford it at all. Yet industries like pharma and biotech remain strong job creators that have held up well during the recession, and they represent parts of the global economy where America still enjoys a leading position. If you were Obama, desperate to find a few bright spots in a troubled economy, you might be reluctant to pick on them.* Amgen (biotechnology): Profit margin, 30.6 percent
* Gilead Sciences (biotechnology): 37.6 percent
* Celgene Corp. (biotechnology): 11.9 percent
* Johnson & Johnson (drug manufacturer): 20.8 percent
* Pfizer (drug manufacturer): 16.3 percent
* GlaxoSmithKline (drug manufacturer): 17.4 percent
* Unitedhealth Group (healthcare plans): 4.1 percent
* WellPoint (healthcare plans): 4 percent
* Aetna (healthcare plans): 3.9 percent
* MedcoHealth Solutions (healthcare services): 2.1 percent
* Express Scripts (healthcare services): 3.7 percent
* Quest Diagnostics (healthcare services): 8.7 percent
* Medtronic (medical equipment): 14.9 percent
* Baxter International (medical equipment): 17.5 percent
* Covidien (medical equipment): 12.3 percent
That bold face part is easy to skip if you're scanning, but the uncomfortable reality is that the high profit companies on his list represent an upside easy to overlook in a bad economy: jobs and stability for at least that many employees, companies and investors. Poking around too much in that pile could be like removing the last Jenga block from an already delicately-balanced stack. (I even thought about a military draft in terms of a jobs program but that's not ready for prime time.)
Newman wrote another good article the next day, The Case for Postal-Style Healthcare. Ir brought to mind a Bill Meyer bit where he posed that anti-government question so often sarcastically asked,
"You want your health care to run like the post office?" (*sneering....*)
To which Meyer replied, "Well.........yes!"
The Postal Service may not seem all that efficient, but it does one important thing pretty well: Transport a letter between any two addresses in the United States for less than a dollar, usually in three days or less. It's such a mundane task that we take it for granted. But if a private-sector firm wanted to compete across-the-board with the Postal Service, it would have to build a humongous infrastructure able to reach every household in America, six days a week. No company wants to do that.
Firms like FedEx and UPS compete with some of the services the Postal Service offers. That's because they've targeted parts of the delivery business that can be profitable if run efficiently. But they want nothing to do with universal mail delivery, which would be a guaranteed money-loser. Gee, that sounds a lot like insurance companies that want to cherry-pick the profitable parts of the healthcare business, offering care to healthy people with employers who can help pay the premiums while steering clear of people with costly problems or less money to spend.
In the mail business, the Postal Service is the deliverer of last resort, required by law to provide a "fundamental service" to the American people "at fair and reasonable rates." But our healthcare system doesn't have a last-resort provider offering basic service at reasonable rates. As a nation, we support universal mail delivery but not universal healthcare.
Amtrak, another favored target of government-bashers, is also a dark-horse model for a federal healthcare plan. Sure, critics deride the government-run railroad for indifferent staff, creaky equipment, and weak financial performance. Yet the only thing worse than Amtrak is�every other mode of mass transportation. On many of its routes, Amtrak competes directly with the airlines, which prove their private-sector superiority every day through negligible meal service, surprise fees, packed planes, and seats designed for supermodels. Even with spartan service, the airlines struggle to earn a profit. A ride on Amtrak, with its cushy seats and unhurried ambiance, makes you wonder if maybe the government should start an airline.
I'm not enthusiastic about that Government Air part. I rode a few times in military aircraft and they were so noisy I couldn't hear myself think. Meantime, I'm trying to imagine ways the biotech, device and equipment people can shift their various product lines to pet care instead of human care. That would keep them profitably in the private sector. And they might someday contribute more in taxes than they now receive in businesses supported by Medicare and Medicaid tax dollars. .
More good reading at the links for whoever has time on a Monday.
. . . the uncomfortable reality is that the high profit companies on his list represent an upside easy to overlook in a bad economy: jobs and stability for at least that many employees, companies and investors. Poking around too much in that pile could be like removing the last Jenga block from an already delicately-balanced stack.Thanks for that insight into how the Obama administration might be thinking. Also, found postal service-health care company provider of last resort comparison illuminating. New to me.
ReplyDeleteThough that profit margin may only be 4% for an insurance company it still comes from a Corporation looking for new and innovative ways to deny coverage to those who paid for it. The profit of each of these industries is combined and this is the cost which is put upon our Citizens and extracted from them as they pay for their lives. The bottom line is this. When your kid gets cancer in Canada or England or Germany or France you don't lose your house.
ReplyDeleteYou understand perfectly. My career in food service was based on a similar proposition in an even larger field than medical care. Our mission was not to resolve all hunger, just that of patrons who could pay.
ReplyDeleteWhat's missing in America is a medical safety net like those of other countries. I've been plodding through D.H.Lawrence's Sons and Lovers (1913). This description of a mine accident resulting in a crippling injury to a breadwinner jumped out at me:
"Morel had a very bad time. For a week he was in a critical condition. Then he began to mend. And then, knowing he was going to get better, the whole family sighed with relief, and proceeded to live happily.
"They were not badly off whilst Morel was in the hospital. There were fourteen shillings a week from the pit, ten shillings from the sick club, and five shillings from the Disability Fund; and then every week the butties had something for Mrs. Morel--five or seven shillings--so that she was quite well to do. And whilst Morel was progressing favourably in the hospital, the family was extraordinarily happy and peaceful. On Saturdays and Wednesdays Mrs. Morel went to Nottingham to see her husband. Then she always brought back some little thing: a small tube of paints for Paul, or some thick paper; a couple of postcards for Annie, that the whole family rejoiced over for days before the girl was allowed to send them away; or a fret-saw for Arthur, or a bit of pretty wood. She described her adventures into the big shops with joy. Soon the folk in the picture-shop knew her, and knew about Paul. The girl in the book-shop took a keen interest in her. Mrs. Morel was full of information when she got home from Nottingham. The three sat round till bed-time, listening, putting in, arguing. Then Paul often raked the fire."
Published in 1913.
How far have we come?
And how much longer must we wait?
What's 4% of a trillion dollars?
ReplyDeleteA trillion is a thousand billion.
4% (if i got the math right) is $400 BILLION?
Seems excessive for an industry that contributes absolutely, and utterly, NOTHING to the health of the citizenry.
I think basing the argument on percentages alone is mis-leading. Just like the commenter just ahead of me.
ReplyDeleteBut my math is better: 4% of 1000 billion = 40 billion.
;=)
"Administrative costs" are often simply a byword for salaries and bonuses. And we know the insurance companies have insanely high administrative costs - unbelievably high, in fact.
ReplyDeleteWhoa...
ReplyDeleteLet's not go off the rails just because this is a comments thread.
Four percent refers to a profit margin of listed companies, not a percentage of America's health care bill. In simple language, four cents of every dollar they collected was what remained after all claims and expenses were met.
In the food business we felt good about keeping a nickle out of every dollar. A four percent margin is very modest.
Contrast insurance margins with those of equipment, drugs and biotech and find a different picture.
The subtext is speculation, but it goes something like this: Wonderful new drugs and equipment are hitting the health care market just like new cars. Insurance beneficiaries, both private and Medicare, see advertisements in magazines, TV and direct mail and say "I paid MY premium so I want some of THAT, doctor!" The doctor (who may also have product samples to pass out "free") complies with orders and prescriptions. This is a damn costly way to do medical care, especially when the new medicine may be only slightly better than a less expensive generic, or the new toy didn't even exist last year.
At some point beneficiaries will have to stop getting champagne for beer prices.
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Pay attention to the big picture. "Public option" is simply another way to say "USPS" for health insurance. It will be burdened with all those whom the insurance companies really don't want and cannot afford. There is no way to know for sure, but my guess is that it will be a pretty unglamorous "option."
During the oil crisis, when it was popular to demonize big oil and Obama was on board with that, I pointed out that oil companies were dramatically less profitable than software and Internet service companies, especially Microsoft who was making something like 70% profit at the time.
ReplyDeleteRecently I have posted More For Less and Dumber Than Usual regarding the fun people are having demonizing the health insurance industry.
And to a previous commenter who says, "an industry that contributes absolutely, and utterly, NOTHING to the health of the citizenry." Well, they must contribute something, because if you don't have insurance in this country, you don't get healthcare.
I read your posts, Bill, and you make good points, very much along the line Newman was following in the first article cited. It's easy to demonize big companies but anyone who has ever worked for one knows a level of predictable income and security that would not be possible for most people on their own. No big economy could survive made up of proprietorships and small businesses alone. I recall years ago an instructive Q&A.
ReplyDelete"What is the worst thing that can happen to any company for it's employees and customers?"
Answer: "Going out of business."
Against that metric corporate profits can be understood in a different light.
But as a society we know that public services, done well, are both more efficient and less expensive than those in the private sector. Transportation, public education and police protection are universal examples. So are Social Security (different from individual security arrangements), welfare (known now as Medicaid) and other government sectors charged with regulating and protecting the public (FICA, FDA, ICC, TSA and an endless list of others).
I think that comment about insurance contributing "nothing" to health was making a distinction between the actual providers of medical care (who DO furnish the care) and others who manage the system. Part of that administrative infrastructure is insurance, whose mission is to manage how we pay for risk pools.