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October 25, 2009

Insurance Companies: "If You Misrepresent our Profits We Will Call You Out!"

Via Glenn Reynolds, an intriguing question:

Some companies noted last week that Congress' plans to mandate that everyone buy health insurance include only weak penalties. The plans also make insurers take on customers who are already sick. If you're young and daring, you pay the low penalty and go insurance-free until your doctor says you've got cancer. You then apply and pay $800-a-month premiums for $10,000-a-month care. Sweet, until the industry inevitably collapses, say insurers.

Suppose they're right. Insofar as Assurant, one of the nation's bigger writers of individual policies, employs 1,900 in its Milwaukee hometown, that's a lot of Milwaukeeans out of a job. The company also leads in high-deductible plans of the kind Obamacare would ban. I know we're supposed to hate insurers, but must we also want their staff unemployed?

If we're toting up the cost of Obamacare, there's surely a ledger line for the demolition of an industry, even an unpopular one. Insurers' power will be transferred to federal agencies, their earnings to a public option, their workers to the dole. Ah, well: Villains defeated.

Obama's justification for not allowing insurers to set prices that reflect the cost of doing business has been that insurance companies are "greedy" and their profit margins "excessive":

Health insurance companies are "making record profits, right now."

Barack Obama, Wednesday, July 22nd, 2009.

And if the insurance industry tries to rebut his accusations with facts, they're accused of lying. So what happens to politicians who lie?

The President's characterization of insurance profits rated a "FALSE" on Politifact's Truth-o-meter. In fact, the insurance industry ranks 86th in profits - hardly obscene by any measure:

As I reported several months ago the industry "Health Care Plans" (includes Humana, Aetna, WellPoint, Magellan, etc.) ranks #86 by profit margin at only 3.3% (see table above, data here for the most recent quarter), not exactly strong evidence of "excessive profits" or monopoly power. Four health insurance companies (Molina, Health Net, Coventry, and Universal American) have profit margins below 1% for the most recent quarter, and another four (Humana, Magellan, WellCare and Centene) have profit margins between 1 and 2 percent (data here).

America's Health Insurance Plan, the industry's trade association, recently reported that annual health insurance premiums averaged $2,985 for individual coverage and $6,328 for family plans in 2009. Using the industry average profit margin of 3.3% means that insurance companies make less than $100 per policy in profits for individual coverage, and a little more than $200 in profits for each family policy. Doesn't seem too "excessive" or an indication of monopoly power, does it?

The Associated Press piles on:

In the health care debate, Democrats and their allies have gone after insurance companies as rapacious profiteers making "immoral" and "obscene" returns while "the bodies pile up."

...Profits barely exceeded 2 percent of revenues in the latest annual measure. This partly explains why the credit ratings of some of the largest insurers were downgraded to negative from stable heading into this year, as investors were warned of a stagnant if not shrinking market for private plans.

The AP points out that many other industries have profit margins far in excess of those earned by the health insurance agency. Are Obama and the Democrats going to demonize those industries too for their "obscene" and "immoral" profit margins?

Health insurers posted a 2.2 percent profit margin last year, placing them 35th on the Fortune 500 list of top industries. As is typical, other health sectors did much better - drugs and medical products and services were both in the top 10.

The railroads brought in a 12.6 percent profit margin. Leading the list: network and other communications equipment, at 20.4 percent.

HealthSpring, the best performer in the health insurance industry, posted 5.4 percent. That's a less profitable margin than was achieved by the makers of Tupperware, Clorox bleach and Molson and Coors beers.

Corporations that can't manage to turn a profit can't sell stock to raise operating funds and Americans who currently own stock in companies like this don't want to see their investments and retirement accounts go up in smoke. If this President is serious about creating a strong economy with low unemployment, perhaps he should stop trying to put American employers out of business.

First they came for the insurance industry. If I ran a corporation with over a 2% profit margin, I'd be pretty worried right now.

Posted by Cassandra at October 25, 2009 05:16 PM

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Not much different than Democrats demonizing "excessing profits" from the oil companies. Never mind they also have razor-thin margins (and go through periods of losing money, depending on the going rate for a barrel of oil, which has more to do with speculators, supply & demand than oil company greed). All I have to say is, God help us all, and I hope not too much damage is done before the midterms a year from now, and that We the People can turn the tide in Congress then...

Posted by: Miss Ladybug at October 25, 2009 07:37 PM

Well, actually, first "they" came for the banks via the Community Re-Investment Act (CRA), and we see how that worked out, huh?

The banks started to protect themselves against losses and default on high-risk loans they were compelled to make under CRA by packaging the risky loans with "good" mortgages as Mortgage Based Securities (MBS). That would make a pretty penny for them. And they did make money on these instruments, for a while.
Then they got the bond ratings services to rate these MBS credit instruments as "AAA" investment grade. To good to fail. Right.

Big mistake.

Then, to protect themselves against an expected and calculated rate of default, they invented Credit Default Swaps and Options (CDS and CDO's). The swaps and options were "guarantees" of continued income to the secondary purchasers should the MBS cash flow dwindle or go negative, which they started to do in 2007.

Well, when Real Estate inflation value started to collapse in California and Eastern Europe about the same time in 2006-07, the yields on the MBS started to fall (as predicted, but not as far and as fast as expected). The CDO's and CDS started to kick in, with a couple of the early results being the failure of Bear Stearns, and the bankruptcy of AIG. The canaries in the coal mine, so to speak.

So I expect that what will probably happen in the near future, once ObamaCare is legislated, is that the gurus of the insurance industry will invent some sort of credit/investment interest instrument as a hedge against what will happen to their earnings when the full effects of Obama Medical Planning (OMP!) fully kicks in.
And of course, there will be counter insurance against the calculated rate of default, which will cause even more damage when the losses become unmanangeable.

Lather, rinse and repeat.

Sometime around the time I will turn 65 and think about retiring, like 2021 or 2022.

The Road to Hell is paved with "good intentions". The Road to Serfdom is paved with a passle of lies.

Posted by: Don Brouhaha at October 25, 2009 10:36 PM

When I reach the age of 65, in another 26 years, Social Security, Medicare, etc. will be long since defunct. I better make sure I'm in good health then because I should as hell won't be able to retire. Of course, 65 isn't what it used to be for most people. My grandfather may have passed away when he was 66 (and already retired), but he got lung cancer from smoking for 40+ years. My grandmother is still with us, and she celebrated her 85th birthday this summer. My Oma - dad's mom - reached the age of 91 before she passed away. I can't imagine before "retired" and depending on only the government to survive for twenty or thirty years, or more. If we don't fix things, no one is going to be able to afford to retire before they die...

Posted by: Miss Ladybug at October 25, 2009 10:52 PM

Well my mother is 89 and in pretty good health, though most of her friends and peers are dead. Her brother, my uncle, is also a very healthy 86.

But I am already a year older than my dad was when he died (lung cancer from asbestos-mesothelioma); most of my paternal male relatives died before they were 60 from cardiovascular problems (related to over drinking and smoking, which I don't do).

"I'll be working here forever,
at least until I die." - Hughie Lewis :)

Posted by: Don Brouhaha at October 25, 2009 11:51 PM

You and me both, Don :p

Posted by: Cassandra at October 26, 2009 12:50 AM

How is that hope and change working out, America? Having a bunch of communist retards in the driver's seat is the pits.

Posted by: Mark McGilvray at October 26, 2009 03:52 PM

I love seeing the truth get spoken, as supposed to the administration's hype. Go, Villainous Company! I work in the health insurance industry, and the margins are thin and becoming thinner in this business. The rhetoric against the private sector is truly frightening in that so much of it is simply not based upon facts, but too many Americans are just believing it because the media reports it as if it were fact, and blog after blog repeats the errors until they are considered facts. We live in a scary world my friends. We're praying for a turning of the tide in the mid-term elections. And by the way, the government runs Medicare and Medicaid, and how's that working? I'm about to turn 53, and I'm beginning to believe that I will never see a dime from Medicare due to the mounting deficits in that program. I wrote Social Security off a long time ago...

Posted by: Debbie at October 26, 2009 10:41 PM

Heck, my rate of return is much higher than 2%, though admittedly I have been able to keep overhead down. My unicycle is nice, but my uniform expenses are quite low (as in zero dollars). Funny thing is, no one here in Key West seems to mind.

Posted by: man riding unicycle naked at October 26, 2009 11:22 PM

" Funny thing is, no one here in Key West seems to mind."

And no one in DC would notice, either. Practiced at that, they are.

Posted by: DL Sly at October 26, 2009 11:32 PM