Farm and construction machinery, Hershey sweets, Yahoo!, railroads, and Tupperware. What do these things all have in common? They’re all more profitable than the health insurance industry. That’s right, the industry that is making “immoral profits” (Nancy Pelosi) can’t even turn out a margin higher than Tupperware. In 2008, health insurance companies as an industry posted a profit margin of just 2.2%. That’s pathetic.
For a quick refresher on how insurance companies make money, they take the premiums you pay and invest them in things like stocks and bonds, or just about any other place you can invest money. When you make some kind of a claim they have to dip into their investments to pay it out. Whatever is left over can earn a return. Once you take out expenses like salaries and underwriting they’re left with just 2.2% profit. At current interest rates, they could do better with certain two year CDs. With such slim margins is it really fair to be attacking these insurance companies as if they’re the villain in this tragedy? The pharmaceutical companies, hospitals, lawyers, and everyone in between are making better returns than this. Are they the villains? It’s food for thought.
If that were the story alone it would be interesting enough for Weakonomics, but I’m not in the business of defending business or giving you some kind of justification in the fight against healthcare reform. Profit margin alone is not sufficient when looking at how evil an industry may or may not be. In fact, many companies see an incentive to reduce their profits when the timing is right. The less profit you have, the less taxes you have to pay. Because salaries and bonuses are expenses and eat into profits, a company may pay out large amounts to reward good work and reduce profit. If you’re doing well in a recessionary environment it may suit your strategy and public relations to not have outlandish profit. Finally though, if the government is looking to clamp down on your business and you expect to get called in to testify before Congress it’s good to have a wild card to toss onto the table.
Do I think the insurance industry is so conniving? I’ve seen companies do worse, but I really don’t think they’re purposely driving down profits, yet. Their poor returns are very much tied to the returns on their investments and 2008 wasn’t exactly the best year for investors. At this point I can only see the low profit being used as a derailment tactic by the industry, a non-sequitur in the grand scheme of the healthcare debate; but I don’t think the low profits are intentional.
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My take is that this item at The Onion tells the true story:
http://www.theonion.com/content/news/congress_deadlocked_over_how_to?utm_source=onion_rss_daily
Juicy Excerpt: “Both parties understand that the current system is broken,” House Speaker Nancy Pelosi told reporters Monday. “But what we can’t seem to agree upon is how to best keep it broken, while still ensuring that no elected official takes any political risk whatsoever. It’s a very complicated issue.”
Rob
Rob Bennett´s last blog ..Podcast #170 — Behavioral Finance 2.0