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Posted at 4:45 PM ET, 02/24/2011

Health-insurance industry: Still not that profitable

By Ezra Klein

The health-care sector is absurdly profitable. According to this data at Yahoo Finance, the sector-wide profit margin is 21.5 percent. But the insurance industry is one of its least-profitable parts: Its profit margin is at 4.54 percent. Hospitals are also a bit strapped, with an average margin of 3.5 percent.

So where's the money going? Drugs and medical technology, mainly. The major drug manufacturers have a 23 percent profit margin. The medical device makers are pulling in 12.6 percent. And this is all happening despite the fact that researchers are having a very difficult time showing that there's much benefit -- either in longevity or quality of life -- to all these new, and incredibly expensive, treatments. I don't want to call this spending waste, exactly. Some of the treatments do improve health, and the money on the table is a good incentive to innovate. But just squeezing insurers and hospitals won't control costs unless the insurers and hospitals can figure out some credible way to either squeeze drug and device makers or somehow ration their products.

What we're all hoping is that the apparently massive amount of health care that does no observable good means that better evidence will allow them to make those decisions in a way that doesn't harm health. We don't have very good answers for a world in which it doesn't work out that way.

By Ezra Klein  | February 24, 2011; 4:45 PM ET
Categories:  Health Economics  
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Comments

But just squeezing insurers and hospitals won't control costs unless the insurers and hospitals can figure out some credible way to either squeeze drug and device makers or somehow ration their products.


EXACTLY. But when they (being the insurers) ration their products they are demonized by the left. You see the problem but you just can't take the rational next step Ezra. Once we get past 2014 and we have 94-96% covered and we've got to address cost (as Mass. is grappling with now) we need to find a way for all entities to work together to reduce costs (similar to what Governor Patrick is doing). As I've "complained" about before you should be following that more closely. That's us all in 5-7 years.


The next costs that need to be seriously looked at is Pharma. Not only is it a 23% profit margin but their market cap is 86% of the entire healthcare sector. Exactly why did President Obama choose to buddy up with them during HCR?

Posted by: visionbrkr | February 24, 2011 5:15 PM | Report abuse

The data points you list are below the average except 1 - drug makers. So what portion is pulling the average up to 21.5%

The drug makers portion of revenues cannot be so large as to make swing the average. It would be good to quote the weight factor that each of the listed elements makes for the total.

Posted by: sailor0245 | February 24, 2011 5:20 PM | Report abuse

"Drugs and medical technology, mainly. The major drug manufacturers have a 23 percent profit margin. The medical device makers are pulling in 12.6 percent. And this is all happening despite the fact that researchers are having a very difficult time showing that there's much benefit -- either in longevity or quality of life -- to all these new, and incredibly expensive, treatments. I don't want to call this spending waste, exactly."

It's nice when you have a monopoly backed with the force of government, isn't it?

Also nice that, at the same time, the people using your products are able to get someone else to pay the bill, and hence you don't have to worry about any value shoppers.

Posted by: justin84 | February 24, 2011 5:26 PM | Report abuse

Is it worth mentioning Drugs and Medical technology have the best salesman and hottest women selling to these doctors? I am sure we all know someone making boatloads in Medical sales.

Posted by: pemlewis | February 24, 2011 6:03 PM | Report abuse

The important column isn't profit margin, it's ROE. That's the amount of profit the company achieves given the amount of capital invested (oversimplifying a bit).
Ranked by ROE (http://biz.yahoo.com/p/5ttmd.html), drugmakers still come out no. 1, but health care plans come in at a respectible No. 2.
Incidentally, the 21% ROE for the industry is about 50% above what the rest of U.S. industry hopes for in its wildest of dreams.

Posted by: RZ100 | February 24, 2011 6:11 PM | Report abuse

Just to add that your larger points still stand.

Posted by: RZ100 | February 24, 2011 6:12 PM | Report abuse

The pharma side of the equation is being dealt with swiftly enough through patent expirations. Well over 60% of all scrips are for generics these days and that is really a cutthroat business with very small margins. When Lipitor goes off patent, Pfizer takes a $16 billion haircut. High cost biotech products will be subject to generic competition sooner because of the lack of primary product patent protection.

It's important to remember that in many therapeutic areas we have all the drugs we need. The only real needs out there are for new antibiotics to combat resistance and in the oncology area (providing the genetics of each cancer can be readily identified).

Posted by: agoldhammer | February 24, 2011 6:28 PM | Report abuse

Nice buy in to the AHIP talking point. What exactly is the valued added for that 4.54% of every dollar flowing through the claims center? That goes to PROFIT and doesn't include the money companies pay to DENY claims.

Insurance companies are crying buckets over only being able to keep 20% of every premium dollar in the individual market and 15% in the group market for what is or should be a bill paying service, and you are letting them whine that only a quarter of that flows to the bottom line-AFTER executive compensation?

Ezra you used to be one of my favorite bloggers. Back when you were on this side of I-5 and not trapped in that Village surrounded by the I-95 Beltway. Sigh five or so years and 3000+ miles away. Time to let this bookmark go the way of the one that used to point to that MY guy. See ya.

(You know those Santa Cruz hippies you blamed for your initial support of the Iraq War? If those DFHs were against it the smart money for smart young fellas was to be for it? Well I bet most of them could spell 'co-opted'. And no it has nothing to do with getting in the 'right' apartment. Well on second thought I guess it does. Congrats on your now years old day job. With nights and weekends off to be a Foodie.)

Posted by: BruceWebb | February 24, 2011 7:11 PM | Report abuse

You want to know where the money goes?

Insurance companies current have a medical loss percentage near 20%, meaning they spend 20% of their total dollars on non health care related expenses. Medicare in comparative has a loss percentage of less then 2%. The insurance companies currently are wasting a lot of our health dollars.
http://www.pwc.com/us/en/healthcare/publications/popups/medical-loss-ratio.jhtml

Other insurances such as home, and car have a loss percentage near 40%
All totaled up America could save near 600 billion dollars A YEAR simply if the government took over all insurances and provided the same level of benifits.
http://insurance.mo.gov/reports/lossratio/index.htm

Pharmaceutical companies are even worse then health care insurance companies. 43% of their dollars go toward things that are not related to producing, or researching drugs.
http://www.actupny.org/reports/drugcosts.html

Posted by: mynameisblehbleh | February 24, 2011 7:19 PM | Report abuse

Second RZ100's comment. The old line about making money through volume is true in some cases, particularly for financial products, which can be conjured up or dramatically scaled in a few keystrokes. ROE is the important metric here.

Posted by: TheodoreLittleton | February 24, 2011 11:03 PM | Report abuse

Where did this idea that ROE is "the" important metric come from? It all depends on what question you want to answer. Profit margin is "the" important metric if the question you want to answer is: what fraction of the money customers pay gets turned into profit rather than services? ROE is "the" important metric if you are doing certain kinds of financial analysis for investment purposes.

The ROE is just the inverse of the P/E ratio. A high ROE implies a low P/E and is associated with a stable, low-growth company. A high P/E and low ROE are associated with high-growth (also generally riskier) companies. A high profit margin on the other hand means the company is taking more of your dollars out of that industry and giving it to investors/owners. You guys who say ROE is "the" important metric for health policy purposes are just making stuff up.

Posted by: jdhalv | February 25, 2011 1:14 AM | Report abuse

This sort of data makes the case for a single price-setter like Medicare. If Medicare squeezes all hospitals and hospitals don't have room for cuts, then drug and technology companies will end up taking the haircut.

If you only have one hospital cutting prices there is no incentive for drug and technology companies to lower prices, they have monopolies on their devices so they have all the leverage. A single payer system counterbalances these device monopolies with a monopoly on payment.

Posted by: zosima | February 25, 2011 1:17 AM | Report abuse

Ezra, you should have pointed out that the data you looked at only included publicly-traded companies. There are private for-profit companies that weren't included, and more important, there are lots of non-profit companies that weren't included. About 1/3 of health insurers and 2/3 of hospitals are non-profit! Not so with pharma, biotech or devices, which are all for-profit and a large majority of their revenue is with publicly-traded companies.

This helps clear up the confusion several other commenters had about how pharma could be the only industry above average and so completely dominate the health care average profit margin.

Posted by: jdhalv | February 25, 2011 1:24 AM | Report abuse

@mynameisblehbleh:

You get a couple of things wrong. You meant to say the net cost of insurance (admin plus profit) is about 20% of premium. It's a bit lower than that. The medical cost ratio (sadly called the medical loss ratio under health care reform) is around 80 to 85%. Don't forget to include non-profits. If you only look at the big public companies it skews the results a bit.

Also, before saying this can be a big source of savings, consider that the net cost of insurance is only about 7% of all health care dollars, broken out into 5% for private insurance and 2% for public insurance (Medicare, Medicaid, VA, etc.). CMS has all this data laid out clearly, so don't take my word for it.

Public programs do not have a 2% Administrative cost ratio (98% Medical cost ratio). That has been debunked numerous times. It is more like 5-10%, and please note that Medicare does not pay its claims with government employees. Private companies do that, historically the Blues (google Medicare Carrier and Fiscal Intermediary for details).

Posted by: jdhalv | February 25, 2011 1:34 AM | Report abuse


I would recommend this health insurance plan i found through wise health insurance to anyone with a growing family who is looking to minimize their medical expenses.

Posted by: velmacarol123 | February 25, 2011 2:12 AM | Report abuse

Obviously something is very wrong here. Either the numbers are bogus or the interpretation is. I don't know which, but I am absolutely certain that the industry profit margin can't be 21% if the profit margins of the component parts are as indicated.

Better take a second, more jaundiced, and more discerning look at this, before you premise any more posts on it.

Posted by: erblack2 | February 25, 2011 4:04 AM | Report abuse

Health iinsurer margin should be calculated on dollars not passed throu to providers. If they have 80% medical loss ratio, a 5% profit is really a 25 percent margin!

Posted by: Jefflte | February 25, 2011 7:04 AM | Report abuse

@jefflte,

that's absolutely false. THe MLR calculation of 15 or 20% INCLUDES the profit figures.

I won't even go into the idiocy of those like BruceWebb and mynameis . . .

Seriously now that your lies have been exposed you still continue. Bruce used to beg for the MLR calculation that he's gotten now and it hasn't even been watered down as many feared and its still not enough. he still spouts off lies about Medicare's 2% admin cost. As jdhalv said correctly it was debunked years ago.


@agoldhammer,

really? Are we feeling sorry for folks at Pfizer making billions per year? Don't worry about biotechs because they're quickly gaining thanks to Rep Eshoo's amendment. President Obama wanted a 7 year wait for generics and they made sure it went to 12 and there's plenty of evidence out there that shows that drug manufacturers slightly adjust a product when its about to come off patent to get extra money from the system. I'm going to stop crying for you now.

Posted by: visionbrkr | February 25, 2011 9:23 AM | Report abuse

What Ezra knows about insurance, other than he thinks it is immoral and unnecessary, is nothing.

Clearly, an intelligent guy with a need for a glass bellybutoon so he can see clearly. basically, a useful idiot, and a smug one in the bargain.

Posted by: buggerianpaisley1 | February 25, 2011 11:17 AM | Report abuse

@erblack2, I described the important fact Ezra left out in my 1:24 response. The Yahoo data only looks at public corporations and excludes the many nonprofits and private enterprises. Left out of the equation: vast majority of small practice physicians, over half of all hospitals and many health insurers (about 1/3 by revenue).

If we looked at net income for all the non-profits and measured an overall health care margin, my guess is that it would come out around 6 percent.

Posted by: jdhalv | February 25, 2011 1:01 PM | Report abuse

One neglected market sector -- retail pharmacy -- where the net profit is 2% for the chain pharmacies, and lower for the independents.

Posted by: cossack2 | February 26, 2011 12:11 PM | Report abuse

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