Why Health Insurers Make Lousy Villains

One of the fresh spectacles we're likely to enjoy this fall is moral outrage—real or feigned—over health insurance companies that may or may not be rapacious.

President Obama has already singled out insurers as the villains responsible for exorbitant healthcare costs that are bankrupting families and businesses and making care unattainable for millions. Rep. Henry Waxman, chair of the House Energy and Commerce Committee, has asked 52 insurance providers for detailed data on pay and perks for executives, junkets for employees, and other ways they spend the money that comes from premiums paid by policyholders.

It seems likely that such an ambitious fishing expedition will reel in a few morsels useful for tarring the whole industry. But on the whole, blaming insurance firms for runaway healthcare costs is a weak argument, because the insurance industry isn't all that profitable to start with.

Some critics would like to see a healthcare sector that's entirely nonprofit, but most Americans seem comfortable with the existing system of for-profit healthcare providers, at least at some levels. Otherwise, the majority of Americans wouldn't say they're satisfied with their existing coverage, and there wouldn't be so much discomfort over the idea of government-funded healthcare.

So if you're comfortable with the profit motive, the next step is to determine a fair profit margin for companies in the healthcare industry. This is where there's bad news for Obama, Waxman, et al.

Overall, the profit margin for health insurance companies was a modest 3.4 percent over the past year, according to data provided by Morningstar. That ranks 87th out of 215 industries and slightly above the median of 2.2 percent.

By this measure, the most profitable industry over the past year has been beverages, with a 25.9 percent profit margin. 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 worst performer was copper, with a profit margin of minus 56.6 percent.

If you're wondering about Exxon (XOM), with its history of gargantuan profits, its profit margin was 9 percent over the past 12 months, according to the research firm Capital IQ. 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 (GOOG) — which had a 20.6 percent margin — and Microsoft (MSFT), at 24.9 percent.

Profit margins basically reflect the percentage of revenue left over after paying salaries, expenses, taxes and lots of other things. So it's possible for firms to pay their executives a lot and still have a low profit margin. That's why Merrill Lynch, as an example, was able to pay huge bonuses to some employees while the company itself lost epic amounts of money.

Government interrogators are unlikely to find abuses on that scale among health insurers. While the rest of the economy has collapsed, most parts of the healthcare sector have remained reasonably stable. So odds are that any bonuses paid at least went out of profitable firms. With profits in many other industries depressed, health insurance profit margins probably rank higher than they would normally would, compared with other industries. And a number of health insurance organizations, such as Kaiser and the Blue Cross plans, are nonprofits. They can still pay high salaries, but since there's no stock or stock options, there are fewer ways for big shots to earn lavish bonuses.

Among the large, for-profit health insurers, profit margins line up with the industry as a whole. UnitedHealthGroup (UNH), the biggest health insurer, had a 4.1 percent profit margin over the past 12 months. WellPoint (WLP), the next biggest, had a 4 percent profit margin. Aetna (AET), Cigna (CI), and Humana (HUM) came in below that.

Health insurers turn out to be underperformers compared with the other parts of the healthcare sector. Pharmaceutical companies have a profit margin of 16.4 percent—seventh highest of the 215 industries that Morningstar tracks. Others segments of healthcare with margins well above the median include healthcare information (9.4 percent), home healthcare firms (8.5 percent), medical labs (8.2 percent), and generic drugmakers (6.5 percent).

The big money, in other words, isn't in the insurance industry. If it's anywhere, it's in the pharmaceutical industry. But the Obamanauts appear to have reached a kind of détente with Big Pharma in exchange for that industry's tepid support for some kind of reform. So Obama and his foot soldiers need to look elsewhere for black hats.

To give a clearer picture of which healthcare firms are earning the most, I've compiled some data from Capital IQ 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.

If you were Obama, desperate for to find a few bright spots in a troubled economy, you might be reluctant to pick on them.

• Amgen (AMGN) (biotechnology): Profit margin, 30.6 percent
• Gilead Sciences (GILD) (biotechnology): 37.6 percent
• Celgene Corp. (CELG) (biotechnology): 11.9 percent
• Johnson & Johnson (JNJ) (drug manufacturer): 20.8 percent
• Pfizer (PFE) (drug manufacturer): 16.3 percent
• GlaxoSmithKline (GSK) (drug manufacturer): 17.4 percent
• Unitedhealth Group (UNH) (healthcare plans): 4.1 percent
• WellPoint (WLP) (healthcare plans): 4 percent
• Aetna (AET) (healthcare plans): 3.9 percent
• MedcoHealth (MHS) Solutions (healthcare services): 2.1 percent
• Express Scripts (ESRX) (healthcare services): 3.7 percent
• Quest Diagnostics (DGX) (healthcare services): 8.7 percent
• Medtronic (MDT) (medical equipment): 14.9 percent
• Baxter International (BAX) (medical equipment): 17.5 percent
• Covidien (COV) (medical equipment): 12.3 percent

Sources: Morningstar; Capital IQ . S imilar 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.

Disclosure: no positions

Comments

[a. palmer jr.:]

I wonder why these profitable companies aren't returning more of the profits to shareholders in the form of dividends rather than sending their board members to places like Hawaii for board meetings. I realize that execs. of a business can pretty well do what they want within the law, but shareholders really own the company. I think it is appalling that the profits of a company are withheld from the owners. Maybe all companies should be handled as trusts with a certain percentage of profits being mandated to being returned. That probably would put a little more "buy" into the stock market.

Aug 27 08:14 AM

[YoYoMama:]

Very simplistic article that never really addresses any of the issues that are trying to be addressed with health care reform.

The fact that margins are low is not a reflection that the system works, but is a reflection of the spiralling costs of health care, which drives down margins for insurers, forcing them to pass the costs on to employers and the insured.

The fact that "most" are happy with their insurance reflects the fact that the employer is shielding them from the real costs of their premiums. How about asking EMPLOYERS about the costs of insuring their employees. You'll get a different story.

As those with gold-plated employer coverage or Medicare continue to believe all is okay, with each passing year, premium costs increase 10%+ every year, and health costs slowly take over our GDP.

ONLY when those with employer coverage begin to feel that pain that those of us on PRIVATE insurance feel will all of us come together and realize - THERE IS A PROBLEM.

But I have complete confidence we'll get there. I have yet to see someone on employer-provided insurance post that their employer is providing MORE benefits and coverage than they did the year before.

Just hope we all don't go bankrupt before then.

Aug 27 10:11 AM

[bigmoney:]

>> rather than sending their board members to places like Hawaii for board meetings

I'd have to run the numbers, but I suspect if this sort of opulence was returned to shareholders, it wouldn't add up to much, maybe a few pennies per share. Even plush executive bonus's spread out over millions of shares wouldnt' add up to much. Probably where the temptation to skim comes from.

Aug 28 08:52 PM