Health Insurance Profits: Not So Outrageous After All?

Analysts point to low profit margins, small contributions to rising total costs.

ByABC News
November 9, 2009, 3:51 PM

Nov. 10, 2009 — -- 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.

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.