Health Insurers Don't Deserve Vitriol

• ByGavin Magor, TheStreet.com Ratings Senior Health Insurance Analyst
• On 5:00 am EST, Tuesday November 3, 2009

NEW YORK (TheStreet) -- Thirty-one insurers dominate the U.S. health-care system. In 18 states, the largest carrier controlled more than 90% of the market last year, according to SNL Financial. WellPoint was the biggest player in 12 states.

With the top-five insurers in every state and the District of Columbia hoarding more than three-quarters of the health-care business, President Barack Obama and Congress have laid much of the blame for the health-care crisis at insurers' doors. After all, in the world's largest economy, 46.3 million people lack health insurance. Or are the insurers unfairly maligned?

At first glance, the figures are compelling. The insurance market is dominated by a few insurers on a state-by-state basis. In 47 states, the largest carrier is associated with the Blue Cross Blue Shield organization (excluding UnitedHealth Group, as it doesn't complete health-insurer filings because of the mix of its business). Unfortunately, the facts don't entirely bear out the theory that we Americans are being fleeced by ogre-like health-insurance companies.

The health-insurance industry is enormous. In the first six months of the year, companies took in over $217 billion in premiums -- an annual rate close to half a trillion dollars. For a cost increase of less than 20% of existing annual premiums, 96% of the country could receive health care and most policies now in effect would include improved benefits. That's a lot of bang for the buck.

Of the $217 billion in premiums, more than $191 billion was spent on medical expenses. After administrative costs, the profit margin came in at an average of 1.9% in the first six months of the year -- in the range of supermarkets, among the least profitable companies in the U.S. Dominant insurers' margins are a bit wider, at, 2.8%, though hardly a king's ransom.

In fact, 17 of those dominant insurers lost money on health care, totaling $575.5 million among them. Blue Cross Blue Shield of Michigan, which holds 95% of that state's market and has been suffering along with the rest of car-centric Michigan during the financial crisis, lost more than $170 million in the first six months of the year.

The most dominant insurer in any single region is BCBSD Inc., which holds 99.9% of the Delaware market. It posted a loss of $2.8 million in the first half.

The least dominant among the big players didn't fare much worse. There were four states in which the largest insurer had less than 40% of the market: Massachusetts, New Jersey, New York and Wisconsin. There was no pattern to profitability, as the biggest insurers in Wisconsin and New York were WellPoint subsidiaries and had excellent returns of more than 10%. The dominant insurers in New Jersey and Massachusetts, on the other hand, each lost money.

Some individual insurers are run extremely efficiently and, perhaps because of that and the fact that they have better control over medical expenses, their profit margins are fatter.

One of those is Anthem Health Plans of Virginia, a WellPoint subsidiary. It collected $1.9 billion in premiums and, after $1.5 billion in medical expenses, returned a 15.6% profit. Even for WellPoint, whose group average was 7.9%, that margin was substantial. The group recorded third-quarter earnings of $730.2 million, helped by an increase in membership and a reduction in medical expenses.

In contrast, Aetna , which isn't represented on the dominant-insurers listing, reported a margin of only 1.8% for its health-insurance subsidiaries in the first six months. Still, its third-quarter profit of $277.3 million beat estimates.

What those figures highlight is that dominance doesn't necessarily equal outsized profits. Additionally, the average insurer's profit, although large in absolute terms, doesn't provide a substantial return for insurers or investors. By inference, it isn't insurers that are the biggest problem in this health-care debate.

Reported by Gavin Magor in Jupiter, Fla.

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