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Junk Economics: A Closer Look at Those Shocking Health Insurance Profits

Robert Book, Ph.D.
The Foundry, The Heritage Foundation
May 17, 2010

The advocacy group Health Care for America Now (HCAN) has released yet another report decrying what they claim are “huge profit gains” by the five largest for-profit health insurance companies for the first three months of 31%. Shocking? Well, one thing the report glosses over is, “31% of what?” The answer: 31% of the profit for first three months of the previous year, which is a (shocking?) $2,415.9 million for the five companies put together.

What they don’t tell you – but which you can figure out with a little arithmetic from the numbers in their report – is how much profit the companies made off of each of their insured members. As of March 31, 2010, the five companies put together had a total of 85.6 million members – and that translates to a quarterly profit of $37.06 per member. Is that shocking?

At an annualized rate – that is, assuming they make the same quarterly profit for the rest of the year, that works out to $148.25 per member for 2010 – or less than 1% of the average family health insurance premium. In other words, if health insurance companies decided to stiff their investors and use the proceeds to reduce premiums, the average family health insurance premium (almost $13,000 for 2009) would drop by less than $150.

So where did HCAN get the huge growth rate from? Well, they reported the profit not as a percentage of the premiums, or as a percentage of assets – but as a percentage of the previous year’s profits. In fact, if we look back to 2008, we find that the profit was $88.10 per member. This works out to an annualized growth rate of 30% from 2008 to 2010.

The huge percentages come about when small numbers change – in other words, the percent changes are big because the underlying profit numbers per member are small, not large. The HCAN numbers are technically correct, but utterly meaningless. Indeed, one ranking shows that when profit is expressed as a percent of revenue, health care plans are the 86th most profitable industry – far behind hospitals, for example.

(HT: Mark Perry)

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