Lower Health Care Costs by Less Insurance Company Profits

[Eckhart Aurelius Hughes]

In my recent philosophy of politics article, Ways to Lowering Health Care Costs, I explained my top 5 suggestions. Please use this thread to specifically discuss my second suggestion, lower health insurance company profits.

Do you think health care costs would be lowered by the creation of a public option that is not paid for with taxpayer money but with the premiums it charges the people who voluntarily use it? Would you support such a public option? If not, why not?

Other than a public option, how would you suggest we create non-profit alternatives to for-profit companies that would enable consumers to reduce the amount of money they spend on health care that goes to profits and thus get more health care for their dollar?

What do you think of the other idea of making it a law that governments can only buy health care plans from non-profit companies so taxpayer dollars aren't being given to the for-profit companies of the cronies of politicians and bureaucrats?

Thanks!
Scott

[whitetrshsoldier]

OK, think about it for a second. When companies DON'T PROFIT from the big payers [those who CAN afford it], how do they subsidize [or offset] the cost of the care for those who have the crappy, catastrophic-coverage-only plans that they pay minimal amounts for?!?

Do you guys really think that an industry who makes, on the average, 4.5% profit/year, is really a "corrupt and evil corporation!!"?

Are These “Evil For-Profit Health Insurance Companies” Really So Evil?

Afternoon Gnomies! Once again I bring you a tale about health insurance. There are a lot of misconceptions out there about just how much money these “evil for-profit health insurance companies
” profit. Anyways, let us consult Yahoo! Finance about three different large health insurance companies. We’ll look at Aetna, Unitedhealth Group, Inc. and Tenet Healthcare Corp.

Aetna Inc. (AET):

Revenue: $32.67 Billion
Gross Profit: $8.23 Billion
Unitedhealth Group, Inc. (UNH):

Revenue: $84.27 Billion
Gross Profit: $6.24 Billion
Tenet Healthcare Corp (THC):

Revenue: $8.89 Billion
Gross Profit: $4.85 Billion
Man! These insurance companies are making such an obscene amount of profits! Let’s have at ‘em boys! Burn ‘em to the ground! We’ll show these brutes what’s coming to them for profiting on our misery!

…

Wait a second. That’s all gross profit. Sort of like, when you get your check, you have gross income before all the taxes, social security, etc gets taken out. What we really get in our pocket is our net income. To really see how much these companies make, and their real profit margins we need to use their net profit figure. Sadly, Yahoo! Finance doesn’t include that figure. However, they do include the true profit margin figure. We can use that and the revenue figure to reverse the formula and find out just how much profit these companies really make. Then we’ll compare them to Wal-Mart, Microsoft and Exxon.

Okay, the formula that you derive the profit margin from is:

Profit margin = (net profit/revenue) * 100

…Net profit is equal to the gross profit minus overheads minus interest payable plus/minus one off items for a given time period…

Source: Wikipedia and probably your macroeconomics textbook

So, when we have the profit margin and the revenue figures, we can reverse that formula to find their net profit. That formula would be netprofit = (profit margin (with percentage as decimal, aka 4.3% is .043)*revenue)

So, let’s plug in our healthcare companies, shall we?

Aetna Inc. (AET):

Revenue: $32.67 Billion
Profit Margin: 3.85%
Net Profit: $1,257,795,000
Unitedhealth Group, Inc. (UNH):

Revenue: $84.27 Billion
Profit Margin: 4.14%
Net Profit: $3,488,778,000
Tenet Healthcare Corp (THC):

Revenue: $8.89 Billion
Profit Margin: 2.63%
Net Profit: $233,807,000
So two of the healthcare insurance companies have broken the billion dollar mark the other makes a quarter billion. Even that is not so obscene in my opinion. Also, keep in mind that this net profit is after everyone has been paid, after corporate taxes, interest payments, etc. This money is used how the company sees fit. Now, let’s move on to Wal-Mart, Microsoft and Exxon.

Wal-Mart Stores Inc. (WMT):

Revenue: $404.91 Billion
Gross Profit: $99.45 Billion
Profit Margin: 3.31%
Net Profit: $13,402,521,000
So, Wal-Mart makes as much as about eleven Aetnas and around four Unitedhealth Group, Inc. Puts a bit of perspective on it.
Microsoft Corporation (MSFT):

Revenue: $58.44 Billion
Gross Profit: $46.28 Billion
Profit Margin: 24.93%
Net Profit: $14,569,092,000
Kind of interesting how much the profit margins change the net profit figures, isn’t it?
Exxon Mobil Corp. (XOM):

Revenue: $346.88 Billion
Gross Profit: $188.55 Billion
Profit Margin: 8.98%
Net Profit: $311,498,240,000
If you want obscene profits, take a look at that. Three hundred eleven billion. For good measure, and so Steve Jobs doesn’t feel left out, let’s look at Apple. Then, to see if Google is really doing no evil, let’s look at them as well!

Apple Inc. (AAPL):

Revenue: $34.56 Billion
Gross Profit: $11.15 Billion
Profit Margin: 14.97%
Net Profit: $5,173,632,000
Google Inc. (GOOG):

Revenue: $22.27 Billion
Gross Profit: $13.17 Billion
Profit Margin: 20.56%
Net Profit: $4,578,712,000
Originally, this post ended here and thanks to a commentator named “Rob” I found out I had made a mistake with my figuring. Details of my original error in the comments. Anyways, I have decided to add a couple more companies. Big pharma anyone? Let’s take a look at four of the biggest pharmaceutical companies here in the United States. We’ll look at Pfizer, Johnson & Johnson, Merck and Bristol-Myers Squibb. Originally, I was going to use only three companies, but I though Johnson & Johnson might be a bit of an outlier in this category as they do make more than just pharmaceutical things (eg. shampoo, etc). Anyways, here we go.
Pfizer Inc. (PFE):

Revenue: $46.17 Billion
Gross Profit: 40.18 Billion
Profit Margin: 16.32%
Net Profit: $7,534,944,000
Johnson & Johnson (JNJ):

Revenue: $61.37 Billion
Gross Profit: $45.24 Billion
Profit Margin: 20.76%
Net Profit: $12,740,412,000
Merck & Co. Inc. (MRK):

Revenue: $23.26 Billion
Gross Profit: $18.27 Billion
Profit Margin: 24.59%
Net Profit: $5,719,634,000
Bristol-Myers Squibb Co. (BMY):

Revenue: $20.90 Billion
Gross Profit: $14.20 Billion
Profit Margin: 26.04%
Net Profit: $5,442,360,000
So, casting aside the Johnson & Johnson outlier (as I figured it would be), these pharmas have better profit margins than most of the other companies. In fact, the companies with the lowest profit margin that I’ve listed are the healthcare insurers. So now that I’ve bombarded you with figures. Are the healthcare companies really making that obscene of a profit? Are they really holding a golden, ruby encrusted dagger to your throat and saying, “You give me money, or you no get better!”? I don’t mind if you check my math because if I’ve gotten it wrong, let me know so I can correct the figures (big thanks to Rob). Mainly since working with rather large numbers, leaving a zero out can be devistating. Anyways, comments and debate are welcome. However, keep in mind this is about healthcare, not Windows vs Mac. Again, all my figures I looked up on Yahoo! Finance. Also, I already have an idea about doing one more article on this issue of healthcare. I do believe I’m going to try to get the phone numbers of the CEOs of these companies and ask them what most of their net profits fund. Still, the profit margins for all three of the health insurers I looked at are less than 4.5%. Take what you want from this data. If I stimulate debate, that’s a good thing. I want to stimulate debate because without it, we know nothing. Without debate, we remain woefully unaware of the other side of the coin.

[Eckhart Aurelius Hughes]

OK, think about it for a second. When companies DON'T PROFIT from the big payers [those who CAN afford it], how do they subsidize [or offset] the cost of the care for those who have the crappy, catastrophic-coverage-only plans that they pay minimal amounts for?!?

I'm not sure I understand your question. If the company uses the revenue it gets from a high-end plan purchased by one customer to pay to cover another person who has a smaller plan, then that isn't profit.

In analogy, if I buy a haircut from a barber for $10, and then he spends that $10 on a new blade for his shop, that's not profit ('$10 revenue from haircut' minus '$10 cost of new blade' = $0 profit). Profit or loss is what's leftover after a businesses expenses are deducted from their revenue. In a non-profit company, instead of giving the profit to shareholders the money (i.e. what's left after deducting expenses from revenues) is either used to lower the rates they charge or re-invested in the company to provide a better product, either way the customer gets more bang for his buck.

Do you guys really think that an industry who makes, on the average, 4.5% profit/year, is really a "corrupt and evil corporation!!"?

I don't see the relevance of that question. Incidentally, I do not think the fact that a organization makes 4.5% profit per year would necessarily mean the organization is corrupt. What percentage profit the organization makes is not nearly enough information to say if it's corrupt or if it's harmful to society. (As for it being evil, that's a term I try to avoid because I think such moral terms are unclear.)

If you have a chance, I'd love to see your answers, whitetrshsoldier and anyone else reading this thread, to the specific questions I asked in the first post.

Thanks!
Scott

[whitetrshsoldier]

OK, think about it for a second. When companies DON'T PROFIT from the big payers [those who CAN afford it], how do they subsidize [or offset] the cost of the care for those who have the crappy, catastrophic-coverage-only plans that they pay minimal amounts for?!?

I'm not sure I understand your question. If the company uses the revenue it gets from a high-end plan purchased by one customer to pay to cover another person who has a smaller plan, then that isn't profit.

In analogy, if I buy a haircut from a barber for $10, and then he spends that $10 on a new blade for his shop, that's not profit ('$10 revenue from haircut' minus '$10 cost of new blade' = $0 profit). Profit or loss is what's leftover after a businesses expenses are deducted from their revenue. In a non-profit company, instead of giving the profit to shareholders the money (i.e. what's left after deducting expenses from revenues) is either used to lower the rates they charge or re-invested in the company to provide a better product, either way the customer gets more bang for his buck.

Lets put it in a short term vs. long term scenario, Scott. Insurers, on average, will often make profits in some quarters, and lose money in others. Because the "cadillac plans" will necessarily equate to more money taken in [a net profit] in some fiscal quarters, insurers will most likely come out ahead every once in a while. It is during these times that they will be demonized. However, when it comes time for them to lose, they are never praised for their sacrifice to the needy, or for paying for the care of those who need it, are they? So why penalize them for taking more than they pay out, as it is obvious that not only will they NOT ALWAYS profit, but that profit is NECESSARY in order for people to make a living doing what they do. If the individuals who offered the service of taking the risk [selling the insurance] had no chance of making a living off of it, would any of us have this benefit?

Do you guys really think that an industry who makes, on the average, 4.5% profit/year, is really a "corrupt and evil corporation!!"?

I don't see the relevance of that question. Incidentally, I do not think the fact that a organization makes 4.5% profit per year would necessarily mean the organization is corrupt. What percentage profit the organization makes is not nearly enough information to say if it's corrupt or if it's harmful to society. (As for it being evil, that's a term I try to avoid because I think such moral terms are unclear.)

The question is relevant because many people consider health-care reform necessary DUE TO the "greedy nature" of insurers. But with a profit of 4.5%, companies are barely paying dividends on shareholders [those funding the risk] and paying those who sell the plans [necessary if you want people to be insured].

[whitetrshsoldier]

Do you think health care costs would be lowered by the creation of a public option that is not paid for with taxpayer money but with the premiums it charges the people who voluntarily use it? Would you support such a public option? If not, why not?

I think that health-care costs will INCREASE with the advent of a "public option". Here are my reasons:

A "public option" will necessarily lead to the subsidization of the care of those who have chosen to place luxuries above their own well-being. The reason I say this is that, although it may not always be the case, many people who are capable of obtaining health care at a low cost right now are not purchasing it. Most healthy people in their 20s-30s can easily afford a minimum-coverage plan at it's current cost [in California, which undoubtedly costs more than in other places in the country] of ~$50 per month. This cost is comparable to most cell-phone plans, and is considerably affordable. However, many still choose NOT to purchase it. Should we find a way to subsidize it in any way, we will ultimately be funding their luxuries in the end, as they will not have to make that "difficult" decision between their health and their comfort.

Now, although the "public option" supposedly does not equate to fully subsidized health care, I think the connection is extremely easy to make. Here's how; consider who would be eligible for 'free' care in any plan that might be written into law. Who would qualify for it? The homeless? The 'disadvantaged'? How would we determine the financial requirements for the cut-off between those who could and could not afford it? Do you think that people who don't care to 'voluntarily' purchase care now would happily 'contribute' to their care then? How would we enforce "mandatory" care? Would we have police knocking on doors? Would we create a new task force [requiring us to spend even more money]? Or would we just end up offering basic plans for either nothing or next to nothing in order to more easily appeal to people [which would encourage 'voluntary' participation]?

Currently, companies who did not provide a "private" plan for their employees would be taxed at approximately 8% of their gross income. To be honest, many places are already spending more than this amount, so why wouldn't they just stop offering benefits and pay the tax? And if companies stop offering care, how likely would it be that even more people would be forced into this "public" plan? Who would set the rates, regulations, and rules for this plan? Who would enforce these laws? Wouldn't these require new government entities? Don't new government agencies cost money? So how are we saving money?

Other than a public option, how would you suggest we create non-profit alternatives to for-profit companies that would enable consumers to reduce the amount of money they spend on health care that goes to profits and thus get more health care for their dollar?

What do you think of the other idea of making it a law that governments can only buy health care plans from non-profit companies so taxpayer dollars aren't being given to the for-profit companies of the cronies of politicians and bureaucrats?

Tort reform [a cap on so-called 'punitive' damages], De-regulation [free-trade across State lines, no State-specific rules regarding minimum requirements, etc.], and the ever-important "LESS TAXATION"!!! [no taxation, either before or after taxes, on qualified health-care costs]. These are a few of my favorite ideas. I'm sure there are more, so let's have them people!

[Eckhart Aurelius Hughes]

I think you're mixing up the proposed health care public option with subsidizing health care with taxpayer money or requiring people to buy insurance from the government. Let's be clear; the public option would be paid for by the premiums it charges to the customers who voluntarily decide to use it. It would not be funded by taxpayers. Thus, it would be as governmental and expensive as a profitable souvenir shop that happened to be owned and run by the White House.

It seems obvious to me that this would help hold down costs by increasing competition in the insurance market.

[whitetrshsoldier]

I think you're mixing up the proposed health care public option with subsidizing health care with taxpayer money or requiring people to buy insurance from the government. Let's be clear; the public option would be paid for by the premiums it charges to the customers who voluntarily decide to use it. It would not be funded by taxpayers. Thus, it would be as governmental and expensive as a profitable souvenir shop that happened to be owned and run by the White House.

It seems obvious to me that this would help hold down costs by increasing competition in the insurance market.

You honestly believe that if the public option has to accept everybody, without regard to pre-existing conditions, and that they will cover all people who apply [regardless of lifestyle], that there is any way it could pay for itself?

The reality is that the truth has already come out about the government imposing fines on those without insurance [that's a TAX, by the way], and taxing so-called "cadillac plans" - you know, those responsible people who bought their own insurance, at 40%.

So how is this program not "subsidized"?

[Eckhart Aurelius Hughes]

You honestly believe that if the public option has to accept everybody, without regard to pre-existing conditions, and that they will cover all people who apply [regardless of lifestyle], that there is any way it could pay for itself?

As I understand it, the proposed public option would not be required to accept everyone. In fact, the majority of US citizens would be ineligible for it. Also, the proposed public option in the US would be paid for by the premiums it charges.

Regardless, the article I wrote said nothing of the specific public option being proposed in the US. It's meant to be philosophy of politics article, not a argument for a particular bill currently being created and considered in the US (which has several provisions I oppose and which does many things that will not lower health care costs while not doing many of the things I suggest to lower health care costs).

I do not see what your argument is against a public option which is not subsidized by taxpayers, but rather is run like non-profit company which is funded by the premiums it charges the customers who voluntarily choose to use it. You may oppose other proposals like the health insurance mandate (which we are discussing in this thread), a tax on so-called a Cadillac health plans, a requirement for companies to accept people with preexisting conditions without penalty and the taxpayer subsidization of health care coverage for those who can't afford it. But that is not what I am proposing in this thread. The public option idea can be implemented even if those other policies are not, and those other policies can each be implemented even if the public option is not. Arguing against those other policies as a way of arguing against the public option is a straw-man argument.

The reality is that the truth has already come out about the government imposing fines on those without insurance [that's a TAX, by the way], and taxing so-called "cadillac plans" - you know, those responsible people who bought their own insurance, at 40%.

So how is this program not "subsidized"?

Those are separate proposals which can and most probably will be in the bill even if the public option is not. In fact, the former is supported by the health insurance industry. The revenue from new taxes wouldn't be used to subsidize the public option.

Again, I think you are mixing up the public option proposal with other proposals.

[whitetrshsoldier]

Regardless, the article I wrote said nothing of the specific public option being proposed in the US. It's meant to be philosophy of politics article, not a argument for a particular bill currently being created and considered in the US (which has several provisions I oppose and which does many things that will not lower health care costs while not doing many of the things I suggest to lower health care costs).

I do not see what your argument is against a public option which is not subsidized by taxpayers, but rather is run like non-profit company which is funded by the premiums it charges the customers who voluntarily choose to use it.

Scott,

I apologize. I agree that if there were private, non-governmental organizations [NGOs] that wanted to provide insurance at no-profit it could theoretically lower premiums.

The problem is that profits are generally razor-thin for most insurance companies anyways, and fluctuations in expenditures are so great from year-to-year that I'm not sure an entity like this could feasibly exist.

However, if it could, I'm sure it would be a wonderful idea, and I'm not against anybody attempting to start one up for a living. In fact, I think there are already a few companies that do something like this.

[Eckhart Aurelius Hughes]

So, whitetrshsoldier, you do not have a major problem with the idea of the government creating a "public option" which is not subsidized by taxpayers but rather is run like a non-profit company funded by the premiums it charges the customers who voluntarily choose to use it?

(Granted, you and I both oppose many of the other things in the health care bills being proposed in the US. And if the proposed public option is in the final bill, we may not support that specific public option proposal depending on the other particular details of that particular plan.)

[whitetrshsoldier]

So, whitetrshsoldier, you do not have a major problem with the idea of the government creating a "public option" which is not subsidized by taxpayers but rather is run like a non-profit company funded by the premiums it charges the customers who voluntarily choose to use it?

(Granted, you and I both oppose many of the other things in the health care bills being proposed in the US. And if the proposed public option is in the final bill, we may not support that specific public option proposal depending on the other particular details of that particular plan.)

Absolutely not, Scott. In all actuality, I support the ability of companies to privately operate as not-for-profit insurance companies if they so choose. My point is that they would most likely fail, and would need government money [in the form of unequal tax-relief/subsidies/and other things unavailable to regular insurance companies]. This would essentially make them "government" entities. So if the government offered that option, it would eventually lead to a tax-payer subsidized insurance plan.

And what company could compete with the capital possessed by the Federal government?