I want to recommend Uwe Reinhardt’s excellent primer on healthcare insurers’ balance sheets using Wellpoint as an example. Here’s the bottom line:
Profits were not that big a deal as a fraction of premium revenue. S.G.&A. expenses typically are a far bigger enchilada worthy of attention. It is here that the health insurance industry is being challenged to search for economies.
As a percentage of total assets of $48,403.2 million deployed by the company (measured at the reported book value on the firm’s balance sheet), WellPoint’s profits in 2008 amounted to 5.14 percent in 2008 and 6.42 percent in 2007.
You can argue over whether Wellpoint’s marketing, administrative, and managerial costs were too high. However, the maximum amount you can consider as profits is the medical loss ratio, in Wellpoint’s case for 2008 15.6%, less some reasonable amount for actual costs of administration. IMO a figure somewhere between 5% and 10% is probably reasonable and that’s comparable to the administrative costs of healthcare insurance in other OECD countries.
Even with the most optimistic view of healthcare administrative costs it’s simply inconceivable that we can approach the per capita expenses being seen in other OECD countries simply through insurance reform. Single payer alone won’t do it and it’s absurd to suggest that the plans before Congress will achieve that, either, far as they are from reducing administrative costs. We’ve got to look in other directions for savings, too.