11/24/2010

Feds Tell Insurance Companies How Much They Can Make

Government Regulations Will Raise Costs, Socialize Industry
Posted by: Brian Johnson
November 24, 2010
h/t to Locker Gnome

A new mandate on health insurers by Kathleen Sebelius and the Obama Administration will cripple many of those insurers, and force Americans into the government system.  New Federal laws call for insurance companies to spend at least 80% of their premium dollars on medical care and quality.  For employer plans over 50 people, the requirement is 85%.  The Administration, and liberal Democrats,  has taken great pains to point out what they call "excessive profits" by insurance companies.  We hear of billions of dollars of profits by these companies, but are these figures correct?  Are the American people being given the whole story? It helps to understand how business operates first. In my opinion, the Obama Administration is economically illiterate.

First of all, what is insurance?  Health insurance is a contract between an individual and a company in which you are essentially betting that you are going to become ill, or injured, and the insurance company is wagering that you don't, or at least not in the near term. Factors such as age, weight, lifestyle, or family health history go into premium costs.  Thus, if you purchase insurance when are younger, premiums are generally lower. If you wait until you are older, or until you have a catastrophic illness or injury, your premiums are going to much higher.  Insurance companies have to make a profit.  Those profits are put aside into huge pools in order to cover people in cases of disaster.  Not just individual injuries or illnesses, but when natural disasters strike, as well.  If a massive earthquake were to strike the Bay Area and tens of thousands of people were injured, the insurance companies have to have the resources to cover medical bills and hospital stays.  That money is not going to be there if companies don't make profits.

The Health and Human Services new rules dictate how much can be spent on overhead.  What is "overhead"? It is the cost of running a business.  Everything from the building costs, lights, water, electricity, training, salaries,  paper, pens, and even the insurance company's own health care costs, are all components of overhead.  If the government is dictating the maximum amount they can spend on this, it shows that they don't have a clue as to what it takes to run a business.

The pointy-headed Ivy-League elites who are coming up with this stuff, most of them have never owned or run a business.  They have hung out in the lounges of academe discussing economics and business as an abstract theory, marvelling over the brilliance of Paul Krugman and Keynesian theory.

They teach:   Cost + Profit = Price (or Premium)

It sounds good on paper, but in reality, it is not how it works.  The company doesn't really set the price.  The marketplace does.  People will pay for a good or service at a price they can afford. The company really has only one thing that they can control in this formula.  The Cost.

Reality:   Price (Premium) - Cost = Profit
Costs = Labor + Overhead + Medical Care Payouts

When government starts messing with how much can be spent on overhead and profits, this is a recipe for disaster.  One of three things has to happen.  If costs cannot be brought down, either profits will suffer, premiums will increase, and/or services will decrease.  In other words, certain types of care will be dropped, medications not covered, etc.  This could be on top of increases in Premiums.  But premium increases are only viable for a limited time.  At some point the people are not going to be able to afford increased premiums, and will have to drop coverage.  If you drop coverage, under the new laws, you are forced into the government system.  Eventually, when enough people are forced to drop coverage, the private insurance industry will be destroyed, or will only be available for those wealthy enough to afford it.

As for these "obscene" profits by health insurance companies.  Lots of figures are thrown around, usually in the bilions of dollars.  A few examples:
Aetna:
Revenue: $32.67B
Gross Profit = $8.23B

United Health Group:
Revenue: $84.27B
Gross Profit = $6.24 B

Tenet Healthcard Corp.:
Revenue: $8.89B
Gross Profit = $4.85B

Huge Profits! But these a gross profits.  Kind of like your check before taxes come out.  What is the profit margin?
Okay, the formula that you derive the profit margin from is:

Profit margin = (net profit/revenue) * 100
…Net profit is equal to the gross profit minus overheads minus interest payable plus/minus one off items for a given time period…
Source: Wikipedia and probably your macroeconomics textbook
So, when we have the profit margin and the revenue figures, we can reverse that formula to find their net profit. That formula would be netprofit = (profit margin (with percentage as decimal, aka 4.3% is .043)*revenue)

So, let’s plug in our healthcare companies, shall we?

Aetna Inc. (AET):
Revenue: $32.67 Billion
Profit Margin: 3.85%
Net Profit: $1,257,795,000

Unitedhealth Group, Inc. (UNH):
Revenue: $84.27 Billion
Profit Margin: 4.14%
Net Profit: $3,488,778,000

Tenet Healthcare Corp (THC):
Revenue: $8.89 Billion
Profit Margin: 2.63%
Net Profit: $233,807,000

Quite a difference in what the pointy-heads would have us believe.  In fact. one of the companies made less than a quarter of a billion dollars.  A lot of money for sure, but does 2.6% sound like obscene profits? Or even 4.14%, which Unitedhealth netted?  That's not even much of a safety margin. 

This is only one way in which those in power manipulate the discussion.  They speak in terms of gross profits, ot total revenue to take political advantage of an uninformed electorate, and then use the misinformation to ram through legislation which will hurt those whom they claim to want to help, the most.  This new mandate is only one more brick in the wall in which government is separating the American people from  their liberty and freedoms.

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