Understanding insurer profits
Health Insurers Battle Rising Costs
By TheStreet.com Ratings Staff
TheStreet.com
January 16, 2008
Health insurers continued to boost profits in the second quarter, even as they struggled to raise premiums in line with health care costs. TheStreet.com Ratings’ review of the financial performance of the 648 health insurers it tracks found that total net income rose by 27.5% during the first six months of 2007 to $8.8 billion, up from $6.9 billion the prior year.
Investment gains helped bridge the gap. They comprised 43.4% of industry profits, up from 35.7% the prior year, growing 55% to $3.8 billion through June 30, 2007 — up from $2.5 billion a year earlier. By comparison, profits from insurer’s core underwriting business increased just 9.1% to $5.8 billion through June 30, 2007, up from $5.3 billion the prior year.
(The study is based on the latest available statutory filings with the National Association of Insurance Commisssioners.)
Donna O’Rourke, senior financial analyst with TheStreet.com Ratings, explains.
Q. Are rising health care costs the biggest risk for insurers?
A. On the one hand, insurers are dealing with rising health costs, and on the other hand — as a result of competitive pressures and unwillingness by consumers to absorb more premium rate increases — the ability to raise additional revenue to cover those costs.
But the industry also does business in an uncertain political environment. Revamping the financing of health care is a hot topic among the presidential hopefuls and many state governors.
The industry has also recently placed a lot of its efforts on the unstable Medicare line of business that is often the target of cost-cutting and heavy oversight by the federal government.
Q. But if profits are rising, should investors — and consumers — be worried?
A. The industry has been going strong for several years, really since 2003, when we came out of the last recession.
This continued profitability and strong market capitalization is reflected in the latest rating review; we upgraded 27 insurers and only downgraded four. This follows first-quarter ratings upgrades of 21 insurers and nine downgrades.
But health care costs continue to rise at a faster pace than revenue, because insurers struggle with raising premiums, and this is starting to affect their bottom line.
Q. Should we be concerned about a rise in investment gains? Are insurers making riskier investments?
A. Not necessarily. Normally, the industry makes some of its money by investing its liquid assets gained through prior years gains in various investments while making most of its profits from the actual business of health insurance.
An increase in investment income is not in itself a bad thing. But in an environment where margins on the core business are starting to narrow, it could become a concern in the future. What we see happening is an uptick in the percentage of profits coming from investments.
Health insurers, which are highly regulated, typically don’t own high-risk investments. If they continue to hold low-risk investments, the income generated from them may not be sufficient to offset a decline in their business.
If insurers choose to raise the risk profile of their portfolios, they will need to make sure they have sufficient capital in place to pay out claims if their bets move in the wrong direction.
Q. Where are the largest areas of growth for health insurers?
A. The Medicare line of business, both the Medicare Advantage business and Medicare Part D, has had the biggest impact in terms of growth on the industry. Margins are very high and have been compensating for the highly competitive employer health insurance market. While this is still very small, we are also seeing growth in the individual private insurance market, and insurers continue to expand their offerings to self-funded employers.
Q. This competition should be good news for consumers, though, right?
A. That’s right. Competition in these lines of business means more choice for consumers and downward pressure on premiums.
http://www.thestreet.com/s/health-insurers-battle-rising-costs/newsanalysis/ratings/10398943.html?
Comment:
By Don McCanne, MD
A few observations:
- The $12 billion or so in annual profits from the insurers’ core underwriting business is a comparatively small proportion of our $2260 billion national health expenditures. If we eliminated these profits, we would not see much change in the overall health care budget. That said, $12 billion would buy a lot of health care and certainly should not be ignored. And it is a $12 billion expenditure that is an inappropriate use of funds designated for health care spending.
- The $8 billion or so of annual investment income is often excluded from discussions of improving financing efficiency. But should it be? That income is derived from the investment of our premium dollars that the insurers are holding in trust for our future health care. Since those are our funds, shouldn’t the investment income accrue to us? If we established our own public health insurance program, the investment return on the reserve funds would be used to reduce the taxes that finance the program.
- Although the diversion of health care profits to the private insurers makes us angry, we have to keep in mind what the greater problem is. The private insurers are a major component of our highly flawed, fragmented, multi-payer system of financing health care. Between the administrative excesses of the insurers and the administrative burden placed on the providers of health care, we waste about $350 billion that could be recovered by changing to an administratively efficient single payer system. We do want to recover that $12 billion from the core underwriting business, but it is far more important to recover the $350 billion through structural reform of our system of health care financing.
- The greatest growth for the private insurers has occurred with Medicare Advantage and Medicare Part D. Margins have been very high in these programs - much higher than in the employer health insurance market. But these are our own public programs. We have handed them over to the private insurers along with a massive excess infusion of our own taxpayer funds. This constitutes a flagrant betrayal of trust by our legislators (which is a definition of treason). Every legislator that participated in this massive fraud should be voted out of office in the next election.
- The insurance industry remains concerned about doing business in an uncertain political environment, including concerns about the unstable Medicare line of business. No problem. By establishing our own national health insurance program, we can provide the insurers with the certainty of knowing that they will no longer have to manage our universal risk pool.