Are Insurers' Profits As Low As They Claim?
As the health care overhaul battle moves out of Washington and onto the airways and main streets during the August recess, America's Health Insurance Plans (AHIP), the trade association for the nation's health insurers, is fighting a familiar battle.
It is fighting the perception that health insurance companies focus more on their shareholders' bottom lines than the interest of their patients.
To negate this notion, AHIP features a dollar bill with one tiny slice out of it (shown below) on their Web site, illustrating that their members only make 1 cent of every dollar spent on health care.
That may be the case, says Princeton economist Uwe Reinhardt, but "whether it's fair or not depends on what it is you want to describe," he says.
"All that statement says is, if you eliminated all our [insurance company] profits, national health spending in America would be 1 percent lower. It has meaning only in that context," Reinhardt says.
Insurers are measuring their profits against total health care spending. That's all the money you and I and employers and insurers and the government spend for doctors' visits, hospitalizations, drugs and other things.
By using the total health care costs, their profits look lower.
But many economists calculate insurance company profits differently. Just like for any other business, they look at what the companies take in — in this case in premiums — versus what they pay out directly, as in claims.
Fortune magazine economists calculate insurance company profits this way:
For the 10 biggest insurers in the year 2006 (the year the insurers used for the 1 cent out of every dollar depiction above), profits were anywhere from 2 to 10 percent, or two to 10 pennies on the dollar. That's two to 10 times as much as what the insurance industry group suggests in its illustrations.
Robert Zirkelbach, a spokesperson for the insurers, defends the depiction.
"Health plans are providing value-added services to people across the country, and the vast majority of people are expressing very high satisfaction with their health care coverage," he says.
And, Zirkelbach adds, health plan profits are in line or even lower than other health care industries. But that may not be enough to give them cover as the Obama administration searches for places to cut the nation's health care bill.
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MADELEINE BRAND, host:
A lot of money is going into those ads and we're going to look now at just how much money health insurance companies make. Here's NPR's Joanne Silberner with the latest in our series on numbers in the health care debate.
JOANNE SILBERNER: Picture a one-dollar bill. Down the right hand side is a thin yellow line highlighting what a tiny piece one one-hundredth of the one-dollar bill really is. The caption: For every one dollar spent on health care in America, approximately one penny - just that skinny yellow line - goes to health plan profits. America's Health Insurance Plans, the insurance company trade group, features the graphic on its blog.
Dr. UWE REINHARDT (Professor of Economics, Princeton University): Whether it's fair or not depends on what it is you want to describe.
SILBERNER: That's Princeton economist Uwe Reinhardt.
Dr. REINHARDT: If you want to describe how much insurance company profits represent the total American health spending, then the one cent is a fair number.
SILBERNER: Reinhardt says the insurers are saying only one thing.
Dr. REINHARDT: All that statement says is look if you eliminated all our profits, national health spending in America would be one percent lower. That -you know, it has meaning only in that context.
SILBERNER: That's because the insurers are measuring their profits against total health care spending. That's all the money you and me and employers and insurers and the government spend for doctor's visits, hospitalizations, drugs and other things. Economists more commonly consider insurance profits based on what each company takes in, versus what it pays out, regardless of what happens in the rest of the health care universe. While insurance company cite the one cent on the dollar figure for 2006, Fortune magazine's economists figured insurance company profits at two to 10 cents per dollar.
To Richard Kirsch, even the one cent profit is too much. Kirsch heads Health Care for America Now - a grassroots group advocating, among other things, for stricter oversight of health insurance companies.
Mr. RICHARD KIRSCH (Manager, Health Care, America Now): Well, it sounds like a little but it's one percent of a huge number. We're going to spend two and a half trillion dollars - that's trillion - on health care this year. And when you're spending so much money, one percent adds up.
SILBERNER: It adds up to $20 billion a year. And, Kirsch says, there's the money that doesn't go directly to health care - administration, CEO salaries and marketing. According to the trade group America's Health Insurance Plans, administration and marketing runs around 12 cents of the revenue dollar. Robert Zirkelbach, a spokesperson for the insurers, says the profit and the administrative costs are worth it.
Mr. ROBERT ZIRKELBACH (Spokesperson for Insurance Companies): Health plans are providing value-added services to people across the country. And a vast majority of people express very high satisfaction with their health care coverage.
SILBERNER: And he says health plan profits are in line or even lower than other health care industries. But that may not be enough to give them cover, as the Obama administration searches for places to cut the nation's health care bill.
Joanne Silberner, NPR News. Transcript provided by NPR, Copyright National Public Radio.
