Healthcare –and healthcare reform—is complicated, in part because so much of what we think we know about American medicine turns out to be untrue. For instance, one would assume that more expensive care would be better. But the Dartmouth research has taught us that isn’t the case. Most people also assume that for-profit insurers are making a fat profit; after all, look at how high insurance premiums are!
But as Rick Newman points out in the most recent issue of U.S. News & World Report , “blaming insurance firms for runaway healthcare costs is a weak argument, because the insurance industry isn't all that profitable to start with."
Over the past year, “the profit margin for health insurance companies was a modest 3.4 percent,” Newman points out, quoting data provided by Morningstar, a company that rates mutual funds. Morningstar would have no reason to low-ball the insurance industry’s profits; its readers are looking for highly profitable sectors of the economy where they can invest. But the health plan industry is not one of those sectors: insurers ranks 87th out of 215 industries.
“The most profitable industry over the past year has been beverages, with a 25.9 percent profit margin,” Newman reports, “Right behind that were healthcare real-estate trusts (firms that are basically the landlords for hospitals and healthcare facilities) and application-software (think Windows). The average for the oil and gas industry overall was 10.2 percent, three times the margin in the health insurance industry. And that's nothing compared with high-fliers like Google—which had a 20.6 percent margin—and Microsoft, at 24.9 percent.
“Profit margins basically reflect the percentage of revenue left over after paying salaries, expenses, taxes and lots of other things,” Newman explains. When it comes to insurers, “revenue” equals all of the premiums that they receive. Those premiums are so high—and have been climbing so rapidly, in large part because the amount of money that insurers have been paying out in reimbursements to doctors, hospitals, nursing homes and patients has been rising by roughly 8% a year, each and every year, for the past ten years. Insurers have been doing their best to pass those costs on to you and me, but they haven’t been able to make huge profits. While the cost of care spirals, the number of customers who can afford to buy health insurance has been shrinking—which has meant tough times for insurers.
“Among the large, for-profit health insurers” Newman adds, “profit margins line up with the industry as a whole. UnitedHealthGroup, the biggest health insurer, had a 4.1 percent profit margin over the past 12 months. WellPoint, the next biggest, had a 4 percent profit margin. Aetna, Cigna, and Humana came in below that.”
But this isn’t to suggest that no one in our for-profit health care industry is making money. “Pharmaceutical companies have a profit margin of 16.4 percent,” Newman reports, “seventh highest of the 215 industries that Morningstar tracks.”
This is why I’m skeptical when drug-makers say that they couldn’t possibly afford to lower prices on drugs—or that if they did, they wouldn’t be able to do research. The fact is that if drug-makers, and their shareholders, could be satisfied with margins of, say 8% or 9% they could, in fact, slice prices. And since roughly 16 percent of the $2.6 trillion that we spend on healthcare goes to the pharmaceutical industry, we are talking about significant savings. (Commentators frequently say that drugs account for “just” 10% to 11% of the nation’s total health care bill. But that’s because they are only looking at the dollars you and I spend, retail, buying prescription drugs in a pharmacy. When you add in the cost of drugs administered in a hospital, a nursing home, or in a doctor’s office –plus the cost of the many medical devices that drug-makers now sell—you find that their share of the $2.6 trillion pie rises to 16%. And if anything, those devices—ranging from stents to artificial knees—are even more over-priced than the drugs.)
Prescription-drug makers are not the only companies turning a nice profit on our health care, other industries with profit margins well above the 2.2 percent median for all U.S. industries include: healthcare information (9.4 percent), home healthcare firms (8.5 percent), medical labs (8.2 percent), and generic drug-makers (6.5 percent).
To give a clearer picture of which healthcare firms are earning the most, Newman has compiled some data from Capital IQ, a division of Standard & Poor’s, showing net profit margins over the past 12 months for a number of well-known companies. “The following list includes the three largest firms in each of five different sectors: biotechnology, drug manufacturers, healthcare plans, healthcare services, and medical equipment. Some of these numbers are sure to be off-putting to Americans who are making sacrifices to pay for healthcare or can't afford it at all. Yet industries like pharma and biotech remain strong job creators that have held up well during the recession, and they represent parts of the global economy where America still enjoys a leading position.”
• Amgen (biotechnology): Profit margin, 30.6 percent
• Gilead Sciences (biotechnology): 37.6 percent
• Celgene Corp. (biotechnology): 11.9 percent
• Johnson & Johnson (drug manufacturer): 20.8 percent
• Pfizer (drug manufacturer): 16.3 percent
• GlaxoSmithKline (drug manufacturer): 17.4 percent
• Unitedhealth Group (healthcare plans): 4.1 percent
• WellPoint (healthcare plans): 4 percent
• Aetna (healthcare plans): 3.9 percent
• MedcoHealth Solutions (healthcare services): 2.1 percent
• Express Scripts (healthcare services): 3.7 percent
• Quest Diagnostics (healthcare services): 8.7 percent
• Medtronic (medical equipment): 14.9 percent
• Baxter International (medical equipment): 17.5 percent
• Covidien (medical equipment): 12.3 percent
Sources: Morningstar; Capital IQ . Similar data on the most recently quarterly profit margins for a number of industries and firms are available on the Web at the Yahoo Finance Industry Center
“The big money,” Newman concludes “isn't in the insurance industry.”
Let me add: this doesn’t mean that the health insurance industry doesn’t need reform and regulation. It does. But the problem is not that it has been pocketing a large share of our premiums in the form of profits. No doubt, insurers spend more than they need to on lobbying and executive salaries, marketing and advertising; the industry could be more efficient. But that is not where the big bucks are wasted.
Billions are squandered because, in recent years, insurers have tended to pay whatever hospitals, the best-paid specialists, drug-makers, device-makers and others choose to charge for their services and products, without asking: “is the patient benefiting?” We know that one-third of our healthcare dollars are wasted on unnecessary tests, ineffective often unproven procedures and cutting edge drugs and devices that, too often, are no better than older safer products.
In the 1990s, for-profit insurers tried to “manage care,” but rather than comparing the effectiveness of various treatments, they tended to compare prices, and say “no” to the most costly procedures even when, in some cases these were the treatments patients needed. By contrast, both the VA (the government insurance plan for veterans), and non-profit insurers like Kaiser have made good use of internal outcomes data to sort through which treatments work best for which patients when making up their formularies (lists of the products and services that they cover. Note: these lists are not carved in stone; at the VA and Kaiser doctors can go outside the formulary if they believe a particular patient needs a different treatment.)
Because the VA, Kaiser and Mayo worry about which treatments are most effective for patients –as well as patient safety—all three stopped prescribing the pain-killer Vioxx for most patients more than a year before the government forced the drug-maker to take Vioxx offer the m
arket. These three insurers saw that Vioxx was no more effective than older, cheaper drugs for the vast majority of patients—and they were concerned about evidence that Vioxx was causing heart attacks and strokes.
For-profit insurers, on the other hand, continued to cover Vioxx because they were worried that, if they didn’t, customers would switch to a different insurance plan, and they would lose market share. The drive to maximize profits for their shareholders drove their decision.
Under health care reform, insurers will be expected to pay more attention to the quality of care that their patients are receiving. But this could be difficult to regulate. This is why we need a public sector insurance option to set high standards.
The healthcare reform bill in the House creates a public-sector plan and calls for Medicare reform. It proposes that Medicare change the way it sets fees, paying more for higher quality care, while discouraging unnecessary, unproven and potentially hazardous treatments. The public sector plan for patients under 65 would incorporate Medicare’s reforms. And since for-profit insurers would have to compete with that public-sector plan, they too would have to focus on providing enrollees with higher quality, safer care at a lower price.