Health Insurance Profits: Not So Outrageous After All?

Health insurance company profits -- higher but not evil?

Ask any bank CEO and they'll tell you: reporting great profits at the same time lawmakers and advocacy groups are clamoring for an overhaul of your industry doesn't make for great public relations. Recent positive third-quarter earnings reports by major health insurance companies may put them in the same boat -- but do they really deserve to be there?

Some analysts say no.

"Insurance companies are not money trees. They got out into the market and buy health care services and resell those services at some markup at health care consumers. I would argue that markup is not that much," said Thomas Carroll, a health care analyst at Stifel Nicolaus. "This whole notion of big bad insurance companies is rather silly."

A cursory glance at third-quarter earning results from major insurers could put the lie to the "they're not money trees" defense: WellPoint late last month reported a net income of $730.2 million, less than last year but better than expected. UnitedHealth, Aetna, Humana and Cigna all saw double-digit percentage increases in their profits. The latter three all reported earnings above $300 million each, while UnitedHealth's third-quarter earnings were just north of $1 billion.

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But the companies' profits still represent a miniscule percentage of the $2.5 trillion Americans spend every year on health care.

"Insurance company profits in the large picture have very little to do with the overall rising cost of health care," said health care expert Henry Aaron, a senior fellow at the Brookings Institution.

Carroll and others pointed out that the profit margins the health insurance companies report -- often below 5 percent -- pace some industries and lag behind many others.

"From a net margin basis, it's not that much," said Steve Shubitz, an analyst at Edward Jones. "The bottom line is any business needs to make money. That's why you're in business."

Carroll said this year's profit increases look especially large because of how poorly companies did last year, when their investment portfolios -- like everyone else's -- saw massive declines.

Take out the role investment income plays in earnings reports, he said, and you'll find earnings for UnitedHealth and WellPoint rose 7 percent and 4 percent, respectively, while Aetna's dropped 36 percent.

"It's a little mystifying why health insurance gets vilified for that profitability," Shubitz said.

Health Insurance: 'A Dirty Business'

For critics of the health insurance industry, of course, the villification is no mystery at all. They point to practices such as cancelling coverage for some sick policyholders and allegations that companies sell expensive policies that cover surprisingly little.

"Health insurance companies are in a somewhat dirty business, really," Aaron said. "They do a great deal of good by helping people to cover risks of serious illness. They also have obligations to their shareholders and they are not charities."

Aaron said that, under the current system, even if insurance companies managed to put an end to their worst practices, they would still have to continue other bottom-line driven strategies, such as charging higher premiums to older people who have been ill in the past.

"I know there are some insurers out there who are doing really egregious things, but it's the system that's the problem," he said. "Even if you got rid of the egregiously bad practices, you'd be stuck with what the companies have to do not to go bankrupt."

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