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Should health insurance companies make a profit?

YesThe case for health insurer profits

By Mary Lou Byrd


Should health insurance companies be allowed to be profitable? Is America a free-market, capitalist society?

Since the answer to the second question is yes, then so must the answer be to the first question. With the recent controversy over Anthem Blue Cross of California’s proposed premium increases in that state (reportedly as high as 39 percent), health insurers' profitability has taken center stage with lawmakers. The question of whether regulators should clamp down on premium increases and control excess profits by health insurers is disconcerting.

Capitalism requires a profit motive

In a free-market system, profits are a motivating factor for running a business.

But some government officials have suggested insurance companies are getting greedy when it comes to their profit base.

"The only way we will get more affordable [health care] is to knock off these profits that are being paid for by the average American. I mean, I don't mind you making a profit, but at the end of the year, 2009, a horrible year, you still made two-something billion, and that is not enough?" said U.S. Representative Bart Stupak (D-Mich.) when questioning Angela Braly, president and CEO of WellPoint, Anthem's parent company, during a House committee hearing.

But WellPoint's referenced “$2 billion in income” was on a base of $62 billion of total revenue according to Fortune magazine, which publishes an annual profitable-industry report. A look at WellPoint's revenues does not indicate record profits. Its net income as a percentage of total revenue was 5.5 percent in 2007, 4.6 percent in 2008 and 4.8 percent in 2009. Health insurance and managed care ranked 35th out of 50 most profitable industries, with a measly 2.2 percent profit margin. While lawmakers are quick to call these "record profits," it's entirely unclear what is an acceptable profit for a health insurer -- or a corporation in any other industry.

Why do health insurers raise premiums? Higher health insurance rates are driven by rising medical costs, and in recent years, medical costs have been rising faster than consumer inflation, according to Kaiser Family Foundation. Insurers set premium increases tied to the medical cost trends they are experiencing in each market. The arguments of the lawmakers in Washington about health insurers' raising premiums for profitability conveniently ignore this cost trend.

Will we start limiting profits for other types of insurance companies? Then again, why limit it to just insurance companies? After all, Americans need food and clothing to survive, so perhaps the grocery and clothing industry should be not-for-profit. In the short run, it may seem like a consumer winner to rail against health insurers' profits, but placing arbitrary limits on industry profitability kills innovation and the entrepreneurial spirit -- and ultimately hurts the country economically.


NoThe case against health insurer profits

By Justin Hancock


Passage of the health care reform bill has upset many Americans. Some say the government has no right to meddle with the health care system, while others call the change long overdue. A look at the recent Anthem Blue Cross of California controversy demonstrates why regulation of health insurance companies' profits is important for protecting consumers against monstrous rate hikes.

Health insurance rates and lack of consumer choice

Earlier this year, Anthem Blue Cross (California's largest health care provider) proposed raising customers' health insurance rates by up to 39 percent. To justify the rate increase, representatives of Anthem Blue Cross claimed that California's total claims in 2009 outweighed their premiums, making current policy prices unsustainable. But according to The Los Angeles Times, Anthem contributed $525 million in earnings to its parent company, WellPoint, in 2009. Even if Anthem lost money in California, earnings in other states certainly more than made up for it.

"They are moving all the profits to the holding company," U.S. Representative Jackie Speier told The Los Angeles Times. "They are just moving the money to hide the jackpot."

Health and Human Services Secretary Kathleen Sebelius also found Anthem's justification unsatisfying.

"Too many Americans are at the whim of private, for-profit insurance companies who are raking in billions in profits each year," Sebelius wrote on the White House blog. "Insurance companies can raise premiums or slash benefits, and there's not much families can do about it, especially if they have pre-existing conditions that would make it hard to get other coverage."

Ordinarily, competition prevents companies from raising prices exorbitantly. If your favorite bakery started charging $5 per donut, you'd probably go to the donut shop around the corner. But health insurance companies benefit from their customers’ lack of choice. At the time of the premium increase, Anthem Blue Cross customers with pre-existing health conditions risked being denied coverage by another company, essentially giving them no choice but to stick with Anthem and its ridiculous rates. The New York Times highlighted the case of Joshua Needle, a 57-year-old California trial attorney, to exemplify the problem.

"Mr. Needle, like many of the 13 million Americans who buy insurance individually rather than through employers, cannot shop for a better deal because he has medical conditions . . . that would probably disqualify him with other carriers."

Until health care reform takes full effect and people are given a fair choice of providers and affordable health insurance, we need regulation to keep the health insurance money-making machine in check.


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