Insurance is without a doubt the best business on earth. Every month, insurance companies from many industries collect premiums from thousands of clients, relying on the statistical likelihood the companies themselves will collect more than they pay out. If the company has a poor year, they raise the premiums for the next year. It is a beautiful business model and a way to guarantee consistent profits year after year. Even better, if a company insures enough subpar clients or assets, it can become “too big to fail” and receive a government bailout when things go completely wrong (see AIG).
Recently, the type of insurance receiving the most media attention is that of health care. With reform on the way, the health care industry is bound to change drastically, for better or for worse. While providers are trembling in pure panic to prepare for the onslaught of newly-insured patients, it seems as though insurance companies might be up for a very profitable year. Take the “big five” health insurance company stocks for example. In 2013, they all outperformed the S&P 500 Index (or the broad market), producing returns between 35 percent and 60 percent. Cigna had the most impressive growth in share price, reaching 60 percent for the year, followed closely by Humana whose shares increased by 51.6 percent.
Nevertheless, the success of health insurance companies is not anything new. Premiums have risen steadily over the past decade. In fact, from 2003 to 2011, the monthly premiums of private insurance companies have risen by 62 percent while the average working wage in the US has risen by only about 15 percent. Talk about beating inflation. Again, the business model is amazing. No matter the situation, companies can simply raise the premium and business continues to thrive.
Adding to their success, health insurance companies experience the luxury of having deductibles even when a patient needs to utilize his or her coverage. As long as the patient’s medical costs do not exceed their annual deductible, companies are provided with protection from pay-outs eating into their revenue.
The other players in the game are the providers, whom the insurance companies have been reimbursing less and less each year. In response, providers have implemented co-payments in order to increase revenue enough to stay in business.
This is not to say that providers are innocent. There have been horror stories of overutilization of the health care system by physicians who are foaming at the mouth to collect insane salaries. One such story is that of McAllen, Texas, a small town with one of the lowest household incomes in U.S. yet one of the most expensive health-care markets.
Consequently, who ends up being punished for this constant push and pull between payers and providers? Clearly, the insured patient population and the taxpayers. In fact, Aon Hewitt, a consulting company, projects that employees will pay nearly $5,000 in health care expenses, including premiums, co-pays, and deductibles this year. That is up nearly 150 percent from 2004, when annual health care expenses per employee were around $2000!
In an article published by Forbes, Robert Lenzner discusses the baffling nature of the rising profits of insurance companies while the new health care bill is supposed to put a limit on such profits. Commonly known as the 80/20 rule of health care, or the medical loss ratio, this part of the bill requires that healthcare insurance companies not have more than 20 percent profit on their total revenues for the year. That means 80 percent of all revenue must be spent on actual medical costs of insured patients. Companies still have the option of raising premiums, thus raising the actual dollar amount of the 20 percent, but that is only speculation.
In any case, a very small group of people, chiefly shareholders and administrations of the aforementioned companies, has found a way to profit from the current health care conundrum. Good for them, right?
William Rusnak is a financial investor and writer, NueMD. He can be reached on Twitter @RusnakMD and on Google+.