Are Health Insurance Companies Making Unreasonable Profits?

Understanding the Profit Margin of Private Health Insurers

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Are the profits may by private healthcare insurance companies unreasonable?. Michael Blann/DigitalVision/Getty Images

One of the common criticisms leveled at private health insurance companies is that they are profiting at the expense of sick people. But let's take a closer look at the data and see where it takes us. Do private health insurance companies really make unreasonable profits?

How Common is Private Health Insurance?

Before addressing the question about profits, it's important to look at how common having private health insurance really is in the United States.

In other words, how many people might be affected by this question.

According to Kaiser Family Foundation data, roughly a third of Americans had public health insurance in 2016 (mostly Medicare and Medicaid). Another 9 percent were uninsured, but the rest have private health insurance that they either purchased on their own in the individual market (7 percent) or coverage provided by an employer (49 percent). Nearly half of Americans have coverage provided by an employer, although 63 percent of them have coverage that's partially or fully self-funded by the employer (that means the employer has its own fund for covering medical costs, rather than purchasing coverage from a health insurance carrier).

But many Medicare and Medicaid beneficiaries also have coverage that's provided via a private health insurance company, despite the fact that they are enrolled in publicly-funded healthcare plans.

33 percent of Medicare beneficiaries are enrolled in Medicare Advantage plans run by private health insurance carriers, and 39 states have Medicaid managed care contracts with private carriers to cover some or all of their Medicaid enrollees. Even among Original Medicare beneficiaries, a quarter have Medigap plans purchased from private health insurance carriers and this number is increasing (it increased 6 percent from 2013 to 2015 alone).

When we put all that together, it's clear that a significant number of Americans have health coverage that's provided or managed by a private health insurance company. And private health insurance companies tend to get a bad rap when it comes to healthcare costs.

Are Insurer Profits Unreasonable?

Numerous articles have been written by people attempting to find coverage during periods of open enrollment. Some of these appear to conflate revenue with profits which adds to the confusion. Of course major health insurance carriers have significant revenue, given that they're collecting premiums for so many insureds.

But regardless of how much revenue carriers collect in premiums, they're required to spend most of it on medical claims and healthcare quality improvements. And although a common criticism is that health insurance companies pay their CEOs too much, that's more reflective of the fact that CEO salary growth in general has far outpaced overall wage growth over the past several decades. There are no health insurance carriers represented among the 100 firms with the highest-paid CEOs, although there are several pharmaceutical companies.

So while a seven or eight-figure CEO salary seems absurd to the average worker, it's certainly in line with the corporate norm.

And health insurance company CEOs are not among the highest paid CEOs of large companies. The fact remains that salaries are part of the administrative costs that health insurance companies are required to limit under the Affordable Care Act's medical loss ratio (MLR) rules. And so are profits.

How Much Do Health Insurers Profit?

If we look average profit margins by industry, health insurance companies are pretty close to the bottom, with an overall average profit margin of just 3.3 percent. For perspective, the banking and real estate industries have profit margins that average over 20 percent, and major drug manufacturers average profit margins of nearly 22 percent.

The ACA implemented MLR guidelines that require health insurance companies to spend the bulk of what they collect in premiums on medical claims. That automatically limits their administrative expenses - including executive compensation and profits - to no more than 20 percent of premium revenue. But there's no similar requirement for hospitals, device manufacturers, or drug manufacturers.

Bottom Line on Profits for Private Insurance Companies: Reasonable or Unreasonable?

Healthcare costs are the driving factor behind health insurance premiums. It's true that private health insurance companies pay their CEOs competitive salaries and they must remain profitable in order to stay in business. But their profits are very modest when compared with other industries.

If you have further questions after reading about profits, learn about the best resources for finding information about health insurance and health policy.

Source:

Kaiser Family Foundation. Insurance Coverage of the Total Population. Timeframe 2016. https://www.kff.org/other/state-indicator/total-population/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D

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