« Public Holding Steady on Key Elements of Health Care Reform | Main | Do You Subscribe to Fox News? »

September 01, 2009

Who Is Making the Biggest Profits From Health Care?

Maggie Mahar
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 market.  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.
  

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00e54ffb969888330120a5931dab970c

Listed below are links to weblogs that reference Who Is Making the Biggest Profits From Health Care?:

Comments

Without Prescription

Lets not forget about the drug companies. They are benefiting handsomely from Health Care.

Alex Bettencourt

I have no idea where my first comment went, but I was simply noting that another cost to our country is medication noncompliance. Missing our pills costs $290 Billion a year! Read more on this report here: http://tinyurl.com/kmhg4c

Steven Messer

While I agree that improvements need to be made in the way we pay for healthcare, I don't believe that a government option is an attractive solution. It is one thing to talk about the "huge profits" of insurance carriers, which I believe this article points out quite correctly, they don't really exist. What makes a government option unattractive is the flip side of the profit coin; waste, fraud and abuse. The budgeting philosophy of the federal government, spend it or you don't get it next year, would make certain that a government health insurance option would bankrupt the country in a very short period of time. The sheer size of the bureaucracy would be staggering. The waste and inefficiency of the government run system, if it were run like all other government agencies, would make insurance company profits look like pocket change.

Bringing more people into the private health insurance system would reduce the premiums for everyone if everyone were paying them. Tax credits and other monetary incentives would get more people into the system without destroying the system. Depending on which number of "uninsured" you subscribe to, simply buying an individual policy for 15 million citizens at $2000 annual premium would cost 30 billion per year. That is a large number in my pocketbook, but not for Uncle Sam! Is this discussion really about getting Americans healthcare coverage, or could it be something else?

There are far simpler and less costly alternatives that could be put into place immediately if were really about getting Americans health insurance coverage.

Gary O.

Maggie, nicely stated; however, let's not forget that the VA, Kaiser and Mayo are not only insurers; they are also providers. As the Darmouth research shows, some providers do a better job containing costs than others. In the fragmented health care industry, the key to reform is to find the best cat herder.

Maggie Mahar

Garyy O., Steven, Without Prescription,

Thank you all for your comments.

Gary O.
There is evidece to suggest that when the insurer is also the provider--and they are on the same page--the collaboration leads to much better, and more affordcable care for patients.
This is not a model that will be dup;licated everywhere but it's well worth keeping in mind.

Steven--

Medicare is a the best example of how a government option would work.

It's not perfect-- the House Health care reform bill calls for reforming how Medicare pays for care, what it pays for and how healthcare is delivered to lift the quality of healthcare while
reducing the costs.

But Medicare is much less wasteful than private insuers. Over the past 10 years, Medicare has done a much better job of containing heatlh care costs. See the chart on p. 2 of this report that I wrote for TCF.

http://www.tcf.org/Publications/Healthcare/Maggie%20Agenda.pdf

Alex-- Your comment was deleted because it was an advertisment for a company.

TCF is a non-rrofit foundation; by law, we are not allowedd to run promotions for for-profits on our websites.

Without Prescription--

Indeed, the pharmaceutical industry has enjoyed 16% profit margins this year.

For most of the past 10 years, prescription drug-makers have been the most profitable industry in the U.S. Employers in other sectors of the economy (who are paying for their employees' insurance) just cannot afford to keep drug-makers (and their shareholders) in the style to which they have become accustomed..

Often, Pharma's defenders claim that drug-makers accoutn for "only " 10% of our nation's health care bill. But that includes only the drugs that you and I buy, retail, at a drugstore. If you incluce all of the drugs administered in hospitals, doctors' offices and in nursing homes--plus the many medical devices (ranging from stents to artificial knees) that drug-makers now manufacutre, you find that the pharmaceutical industry gobbles up roughly 16% of the $2.6 trillion that we, as a nation, spend on healthcare.

If Medicare began to negotiate for discouts on drugs (as the House bill stipulates) and a public sector insurance plan followed suit (again, under the House bill) , that could have a significant effect on reining in healthcare spending.

The VA negotiates for discounts and pays 50% less for the 10 most popular drugs that seniors use.

Maggie Mahar

Garyy O., Steven, Without Prescription,

Thank you all for your comments.

Gary O.
There is evidece to suggest that when the insurer is also the provider--and they are on the same page--the collaboration leads to much better, and more affordcable care for patients.
This is not a model that will be dup;licated everywhere but it's well worth keeping in mind.

Steven--

Medicare is a the best example of how a government option would work.

It's not perfect-- the House Health care reform bill calls for reforming how Medicare pays for care, what it pays for and how healthcare is delivered to lift the quality of healthcare while
reducing the costs.

But Medicare is much less wasteful than private insuers. Over the past 10 years, Medicare has done a much better job of containing heatlh care costs. See the chart on p. 2 of this report that I wrote for TCF.

http://www.tcf.org/Publications/Healthcare/Maggie%20Agenda.pdf

Alex-- Your comment was deleted because it was an advertisment for a company.

TCF is a non-rrofit foundation; by law, we are not allowedd to run promotions for for-profits on our websites.

Without Prescription--

Indeed, the pharmaceutical industry has enjoyed 16% profit margins this year.

For most of the past 10 years, prescription drug-makers have been the most profitable industry in the U.S. Employers in other sectors of the economy (who are paying for their employees' insurance) just cannot afford to keep drug-makers (and their shareholders) in the style to which they have become accustomed..

Often, Pharma's defenders claim that drug-makers accoutn for "only " 10% of our nation's health care bill. But that includes only the drugs that you and I buy, retail, at a drugstore. If you incluce all of the drugs administered in hospitals, doctors' offices and in nursing homes--plus the many medical devices (ranging from stents to artificial knees) that drug-makers now manufacutre, you find that the pharmaceutical industry gobbles up roughly 16% of the $2.6 trillion that we, as a nation, spend on healthcare.

If Medicare began to negotiate for discouts on drugs (as the House bill stipulates) and a public sector insurance plan followed suit (again, under the House bill) , that could have a significant effect on reining in healthcare spending.

The VA negotiates for discounts and pays 50% less for the 10 most popular drugs that seniors use.

no prescription pharmacy

It's not perfect-- the House Health care reform bill calls for reforming how Medicare pays for care, what it pays for and how healthcare is delivered to lift the quality of healthcare while
reducing the costs.

reciprocal link checker

Don't forget about the BIG drug companies. They're profiting from health-care big time. They are not in it to help their are in it to profit

watch the hurt locker online

Maggie, nicely stated; however, let's not forget that the VA, Kaiser and Mayo are not only insurers; they are also providers.

Victor W. Whitmore

First I am not a big wheel on the wagon, I am getting so tired of listening to Heath care reform, I think I will get sick. Insurance companys like any other bussiness cap their min. profit gains, increase premiumes to maintain. When a company shows a profit of 2.5%, oh my thats low. But lets look at the numbers not the percentage, that amount of profit could be in the amount of Billions. Where do we say enough is enough. Insurance companys control their profit on the expences paid out to Doctors and medical care. Lets get smart the and cut it out by the root. But a lid on the cost of Medicine, Doctors, and health care. Then put a lid on the insurance company and drug manufactures on the amount of money they can charge. If you dont it will just be like a weed, keep coming back. If the government officials would stop supporting the big busines's based on who can put more money in the pocket and start working for the people. Sure the rich will save money on health care, but the main point is, the poor can aford it. Oboma said, no american should be without health insurance! I believe that no American should be without hearlth care! Reform health care where the fungus started, not cover it up with a patch.

Maggie, when you want to talk profit, talk in dollor not percents. Dont blind side the people with percents when the insurance companys in reallity make millions in profit. Those milions can be shown as a small percent and there look like nobody makes anything.

I am retired now, disabled and my monthly budget is below poverty, it cost an average of 500-800.00 to pull a tooth. going by your stats, I have a profit of -36% after all is paid. In the Philippines for an example, that amount would be 22,500 peso. It cost me 300p to have a tooth pulled. Thats about $6.00. If we pull apart a Doctors billing and charges, you will find about a 95% profit, covering it up in tax reform, a 250,000 car being wrote off for use. Numbers and percent can and will always be covered up and reduced.

I live in the Philippines because I cant aford to live in the country I fought for and believe in. Like the thousands that live here do.

There are two types of people who should never run for a public office, Lawyers and car salesman. We all know about car salesman. I had to say something funny.
thank you

Maggie Mahar

Victor--

On profits as a percent of revenues-- --think of it this way.

If a company makes $5 million in profits, that might sound pretty good. But if that company has revenues of $500 million, this means that $495 million of revenues went to pay the company's expenses-- the labor, materials, advertising costs etc. that it took to produce and sell $500 million worth of goods.

No one is pocketing hundreds of millions of dollars. That money is all going out the door.And the remaining $5 million in profits is being shared by tens of thousands of shareholders. They are making very little profit.

The next yaer, if the same company sells $470 million worth of goods--just $30 million less-- the company will wind up losing $25 milion. One or two bad years, due to a bad economy, bad weather, whatever--and it goes under.

Companies need a "profit margin" of more than 1% or 2-3% in order to buffer them against economic cycles, changes in trends, higher taxes, etc.

That's why when you look at profits, you have to look at percentages, not at absolute dollars.

I hope this helps.

rx without prescription

Pharma's defenders claim that drug-makers accoutn for "only " 10% of our nation's health care bill. But that includes only the drugs that you and I buy, retail, at a drugstore. If you incluce all of the drugs administered in hospitals, doctors' offices and in nursing homes--plus the many medical devices (ranging from stents to artificial knees) that drug-makers now manufacutre, you find that the pharmaceutical industry gobbles up roughly 16% of the $2.6 trillion that we, as a nation, spend on healthcare.

Johnsmithlucky2012

Don't forget about the BIG drug companies. They're profiting from health-care big time. They are not in it to help their are in it to profit

christian louboutin

they represent parts of the global economy where America still enjoys a leading position.”

The comments to this entry are closed.