A breakdown of health care profits

Tags: Health Care

There has been a lot of anger about health insurers’ profits in America. Like many Americans, yours truly, the trusting author of this blog, has heard President Obama talking about record profits amongst health insurers in his town hall meetings and became disillusioned by the greed that existed in the market.      

But is there greed?      

Only way to find out is to look at the income statements of the health insurers and try and calculate how much profit is made exactly.      

For this discussion, I used the income statement of WellPoint, one of the biggest insurers in the US. You can examine that income statement here. Note, Before you think their revenues are pitiful, note that all data is reflected in millions.      

Revenues

When we examine the income statement for 2008, we can see that the total revenue came to $61,579 million dollars.      

If we break that down, we see that $57,101 million or 93.2% came from premium revenues and$3,836 million (6.3%) came from fees for administering the claims of employers that self insure (meaning they set aside their own funds to cover their employees health care and WellPoint administers this scheme for them.) $641 million, about 1% comes from other revenue, not specified. This is probably interest earned on money that is received before payment was due, or moneys received in advance of claims actually being approved (when a user signs up, they generally have to pay the premium, when they get declined, the premium is refunded. During that time, interest is earned).      

Expenses

47,742 million is paid out in benefit expenses      

      

Benefit expenses simply means paying out health benefits such as doctor consultations, hospital stays, etc.      

The other expense is paying for drugs the insured buy:      

      

This amounts to $468 million dollars.      

These two expense figures combined come to $57,101 million.      

This expense only relates to the revenue made on premiums and totals 84.4% of that:      

 Strictly speaking, that does not mean that 84.4 cents of every dollar you spend on health care returns to you in the form of health care benefits. But that is a whole other discussion.    

You could argue that a portion of other revenue should be counted as well. Remember that other revenue is most likely derived from premiums paid early and premium payments held before the applicant is allowed to be insured by WellPoint. Some of that money would also be generated from payments make by employers who provide their own funds and pay WellPoint to administer their health care fund. But because we can’ t breakdown the ‘other revenue’ we are not including in here. I admit that makes the ratio of revenue on premiums vs expense paid out on health benefits imperfect. For this break down, we treat the data in the benefit of the health insurance companies.      

Another expense is incurred in the marketing budget. Total marketing expenses were 1,778 million:      

Marketing expenses should be measured against total revenue, as all services are marketed:      

Marketing expense is a total of 2.6% of total revenue.      

Then there is the expense of administering the company. That comes to 7,242 million.      

That  comes down to 10.7%. Many business owners will recognize this as a very high number, but administering millions of claims is quite a complex business.      

Profits

So taking all of these expenses in account, how much profit does WellPoint make?      

Well, we need to substract all the expenses above.:      

Total expenses come down to 58,128.7 million or 86% of total revenue.      

That is when the tax man comes knocking on your door.      

 Are health care companies making obscene profits?

After we subtract expenses and income tax from total revenue, the total profit made is 4.04% of total revenue.      

If we consider this number, the problem doesn’t appear to be excessive profits, but rather problems with efficiency in expenses. We noted that  administration amounted to 10.7%, which is a far more worrying number than a profit margin of 4.04% which is neither high nor low compared to other industries. It is rather the administrative expense that should be studied to find higher efficiencies.      

A bigger picture for good form

Before every accountant starts sending me angry comments, we need to include some other figures. We haven’t taking into account the total assets and to examine these we need to turn to  the firms balance sheet.     

Here we find the total assets:     

     

Taking the total assets deployed by the firm profits total 5.14%. down from 6.42% the year before.     

If we examine the percentage that the equity shareholders had in WellPoint profits were 11.62% down from 14.55% in 2007.     

Again, these numbers aren’t particulary offensive.

Also read my historical perspective on health care.

Tags: Health Care