Sunday, November 8, 2009

What Profits? -- commentary

This headline in the October 26 edition of The Jonesboro Sun grabbed my attention: “Health insurer profits not so fat.” I wondered how long it would be before some aspiring reporter discovered this fact. It was an AP story.

I have stayed out of this health care debate, mostly because I have a lot of opinions but no answers. But, the afore mentioned article brings back some memories that do have some bearing on the debate.

When working as an insurance agent, I sold a rather large group health insurance plan to one of the Alaska Native Corporations. Because I sold the plan, I got to sit with the insurance executive as the plan was being put together. To my amazement, he began his model by assuming a two per cent profit. As part of the plan, the company insured itself against any catastrophic claims. In effect, all the underwriting company did was shuffle paperwork for their two per cent profit and assume the minor risk of routine claims which they paid out of premium dollars. Even at that, though, they lost money on the contract since there was no fat.

There is money to be made in insurance, but not health insurance. The public assumes the insurance companies are making huge profits because premiums keep rising. However, premiums are always a reflection of claims. As claims go up, premiums must follow. The key to controlling insurance costs is to find out what is driving up the costs of health care and reverse the trend if possible.

As a side note, one might ask why an Alaska Native Corporation wanted to pay thousands of dollars a month for a health insurance contract when they were all covered free under the Public Health Service, a government plan.

Health insurance companies are too often portrayed in this debate as making obscene profits. What is an obscene profit? When talking to students about capitalism and profits, I often set up the following scenario: If you had a million dollars of capital setting in a secure investment and paying you five per cent annually, which would be $50,000 a year, how much profit would you have to make to take it out and invest it in a business? Remember, once you invest it in a business, you have put it all at risk. Would you do it for 6 per cent profit? For 8per cent?

Before you answer, remember that while the money was setting in your secure investment, you did not have to do anything. It made that money whether you slept all day or didn’t. You didn’t have to be responsible for employees, put up with people who were incompetent, wanted the day off, called in sick, and so on. Also, you did not have to put up with government inspectors, regulators, and tons of paper work, and nothing was at risk. You didn’t need to hire a CPA or a tax lawyer. So, how much profit are you going to have to make before you will take your money out of that secure investment and risk it in a business?

I don’t know about you, but I wouldn’t do it for 10 or even 15 per cent. The sad truth is; however, very few small business people make a ten per cent return on their investment. The article said that even of these big health insurers “profit margins typically run about 6 per cent, give or take a point or two.” However, ... “Profits barely exceeded 2 per cent of revenues in the latest annual measure.”

One step that ought to be taken in the health care debate is to quit using the term insurance. We are not talking about insurance; we are really talking about prepaid health care. Insurance is a financial instrument that helps people manage catastrophic risk. When we start talking about low deductibles or first dollar payments, we are no longer talking insurance.

People, who readily accept $500 deductibles for auto or homeowner’s insurance, want $50 deductible for health coverage with no co-payments. They insist on maternity coverage even though maternity costs can be planned and budgeted for. Many people run to the doctor for little things that they would not bother with if it weren’t for the insurance or if they had a co-payment. Others wake up sick on Thursday, but don’t go to the doctor. By Saturday, when the doctor’s office is closed, their problem has escalated and they run off to the emergency room. These things create unnecessary costs which in turn drive up the premiums.

Consumers of health care could do a lot to control costs if they would use common sense. Admittedly, claims are also higher because of some real positive things such as technology and modern drugs. I don’t think any of us want to go back to the health care of 50 years ago.

We already have close to universal health care, but it has been put together piece meal because it has been done incrementally by those who couldn’t get the whole package passed into law. Though I do not favor government health care, it looks like we are going to get it, and it would be better if it were carefully planned rather than done piece meal. It now looks, though, like there may be too many cooks preparing this broth.

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