Insurance Companies and The Profit Myth

September 18, 2009
By

President Obama is devoted to eliminating all the myths that exist around the Health Care Reform plans.  However, the Administration is one of the main sources of those myths.

One of the myths that the Obama Administration is pushing is that the government will be able to provide health care cheaper as they will be able to cut out all the insurance company profits.  In fact, he often refers to “those huge insurance company profits”.  The President is either trying to mislead people or is ignorant of how a business operates.

From conversations that I have had, I belive that many people are misinformed.  I have heard people talk about the evil insurance companies and their 1000% profit increases or the immoral insurance company 150% profit.  With comments similar to those being floated on TV, I am sure that people do not understand or know the truth.

For starters, many people don’t know what a profit is or how it is calculated.  A company’s profit equals its revenue minus expenses.  More simply, the cash it takes in minus all the bills it has to pay.  And as pointed out in a post over at HotAir.com, insurance companies only keep 4 to 5 cents for every dollar they take in which is 4 to 5% profit and not anywhere near 150%.

The simple example of a grocery store can help explain.  When you spend $100 dollars at the grocery store, that $100 dollars is the revenue that the store receives.  However, that $100 is not profit.  Assuming the grocery store has a 50% markup on the products you bought, they had to pay $50 dollars for the goods that you bought.  That leaves them $50 dollars in profits right?  Wrong.  They still have to pay the employees, pay the utilities, advertising, rent, and other expenses.  Then, what ever is left over after paying those expenses is taxed.  What is left over is  the profit which is kept by the company or sometimes distributed to shareholders.

So now that we understand what constitutes profit, where does that leave all those insurance company profits?  When I started hearing all those comments, I went on Yahoo Finance to get the facts.  I looked at the top five insurance companies ranked by size at year end 2008 to see what their profits were.

In 2008, Unitedhealth Group kept 4% of their revenue.  The next two largest, Well Point and Aetna also had 4% profits.  The next two, Cigna and Humana had 2% profit.  Note that the total total profit for the top five companies was approximately $7.8 billion, but that number represents only an average of 4% industry profit. 

The top five insurers also paid $3.5 billion in taxes in 2008 or roughly half of their net profit.

Americans need to wake up and realize that they are being spoon feed misinformation to demonize groups of people and industries for political purposes.

Whenever you hear somebody in person or in the media talk about record profits, high profits, and windfall profits, you need to examine the true numbers to see if you are being mislead.  The surest way to take away freedom is to mislead people with false information.  Americans need to watch government closely and examine the facts since the media is unwilling to publish facts and prefers to stick to their own agendas.

Tags: , , , , ,

6 Responses to Insurance Companies and The Profit Myth

  1. [...] Insurance Companies and The Profit Myth [...]

  2. Nancy Taylor on February 12, 2010 at 10:39 pm

    What are the figures for 2009?

  3. Steve Mustanski on February 13, 2010 at 8:54 am

    I did a quick calculation and for 2009, the industry did “much” better with the top 5 insurance companies averaging a 5.2% profit. Count on the anticapitalists in the media and the government to report that increase from 4% to 5.2% a massive increases in profits.

  4. D-Mac on March 17, 2010 at 2:10 pm

    Percentages simply mask the massive amounts of money that they actually represent. The parent company that owns Blue Cross/Blue Shield here in NC posted a multi-billion dollar profit last year. That may be only a few percent but when you are talking about a multi-billion, possibly trillion dollar per year industry even 1% is a staggering amount of money. Whether you are talking about 1% or 4% thats still a mountain of money.

  5. D-Mac on March 17, 2010 at 2:24 pm

    Also don’t think that you aren’t being, “Spoon-fed misinformation” on this blog as well. Why don’t you post the real dollar amounts of profit reported by say, the three largest insurance companies in the United States. After you shatter the billion-dollar ceiling the percentages of profit begin to be less relevant and the actual dollar amounts of profit should be scrutinized. If i have a 75 billion dollar a year company that makes 2% profit, that is still 1.5 billion dollars of pure profit. I am not one for limiting the amount of profit a company makes, but if you deny claims and rescind the policies of people who need the health coverage it becomes a morality issue and these companies should have a sense of responsibility to the society they serve. This county doubly, nay quadruply for companies that operate under protection from monopoly and anti-trust laws by the US Gov’t. If the Gov’t dropped their protection of these companies, they would be immediately dismantled by anti-trust legislation.

  6. Steve Mustanski on March 17, 2010 at 3:06 pm

    So…

    The top five insurers made 7.8 billion in profit as the post indicates. All of the data is public information and is not “mis-information”. The problem is that the adminstration and the media are feeding people mis-information. “Did you hear about that 1000% profit increase? gasp! They have CEOs running their companies and stockholders too!!!!”

    The media and the government throw out big numbers to outrage people.

    You seem to advocate that companies can make money as long as they meet some moral standards. Whose? Medicare and Medicade deny more claims than all of the private companies combined. You want the government to run this?

    The government doesn’t protect insurance companies, the enforce the state by state monopolies. That is why you hear so many people calling on reform to allow people to buy insurance from other states.

    In an insurance company denies coverage in violation of the policy contracts, then they should be held liable. However, if you have a policy that doesn’t cover say glasses and you need them, should the insurance company that you bought insurance from be forced to pay for your glasses?

Leave a Reply

Your email address will not be published. Required fields are marked *

Sponsor Links

Follow Us on Twitter