Reader Question – Aren't insurance companies evil?

A reader writes:

How is it that Health Insurance Companies are able to make such huge profits while the system is in such a mess?

Another writes:

When will everyone open up their eyes and see that the true enemy is the private insurance industry?  Those blood-sucking leeches have bought off our democracy!

Let’s all take a deep breath.  If you’ve heard me on the radio, you know that I do not want to demonize the insurance industry.  Many, if not most, of the people who work for the insurance industry are good people who care about others.  I talk to doctors about health care reform all the time, and I’m careful never to demonize those that disagree with me.  They’ve all drunk the kool-aid.  They want to do good, make people better.  If they really just wanted to make money there are other, easier, quicker ways to do it.

As to the first question, it’s important to note that the profits of the insurance companies, while significant, should not be overblown:

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, 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—which had a 20.6 percent margin—and Microsoft, at 24.9 percent.

Yes, they make money.  But that’s not the real issue.  It’s how they make money.  The simple economic forces (not the morals) of private insurance mean that they make money by (1) preferentially covering healthy people and (2) not paying for care.  That’s really it.  So when private insurance “competes” and gets better at what it does, it’s getting better at (1) not covering sick people and (2) not paying for care.  That’s… not good for a health care system.  That’s the real problem.  It’s the amount spent on underwriting, claims review, advertising, and – yes – executive salaries that we could do without.

As to how they still make money in these difficult times?  Well, it turns out that many people are delaying care because they can’t afford the co-pays or co-insurance.  Insurance companies run on such tight margins that even small delays like this can result in pretty impressive increases in revenues, which can compensate for lost customers and premiums as people lose their jobs and insurance.

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