Isn't profit what the board keeps after they pay for everything including the people in the board's employ? So in that sense the profit margin doesn't mean terribly much because you can always pay more to your senior managers and less to your patients.
The 80/20 rule[0] requires insurance companies to pay out at least 80% of premiums. That's revenue, not profit, and is independent of their costs.
So if they were a charity which magically had 0 costs the most payouts could increase is 20%.
Healthcare demand is infinite and providers have every incentive to inflate costs and recommend as many services as possible. I don't like our healthcare system but as it is, insurance companies play a necessary role of rationing care and there is no magical fix to claim denials.
You keep claiming managed care organizations are earning outsized profit margins, but the audited financials on their 10-Ks indicate otherwise, as do their subpar annual stock returns.
You can either accept that these business do not have a lot of pricing power, and they compete on razor thin profit margins (except UNH, but that is because they sell software and healthcare, not just insurance). Even then, their profit margin is only 5% or so, which is objectively a low profit margins.
Or you think there is a massive fraud and a nationwide conspiracy amongst 7 publicly listed businesses (UNH/Elevance/Cigna/CVS/Humana/Centene/Molina), and numerous non profits like Kaiser Permanente and various BCBS affiliated plans (because their premiums are basically the same as the for profit insurers).
The easiest thing to do though, is ask yourself why shareholders would accept lower annual returns if their business they own earns so much money?
You would think they could do better than SP500 if they were raking it in. Although, UNH did do better, but that is because they sell more high margin stuff like software and healthcare.
> You can either accept that these business do not have a lot of pricing power...
I definitely do not accept that assertion. Especially for the big vertically integrated ones like UHC.
> Or you think there is a massive fraud and a nationwide conspiracy amongst 7 publicly listed businesses (UNH/Elevance/Cigna/CVS/Humana/Centene/Molina), and numerous non profits like Kaiser Permanente and various BCBS affiliated plans (because their premiums are basically the same as the for profit insurers).
Good article, and they definitely do skate on the line, but there aren’t any indictments and it doesn’t seem there is any evidence they are colluding. Just lack of enforcement by the feds means it pays off for everyone to break the rules, but even then, the business is not profiting much.
>Walmart's is lower than that
So? That doesn’t mean 5% is a low profit margin. And the other MCOs are at 3% or less.
> That's why they do stock buybacks.
The effects of stock buybacks are incorporated into the total return calculation, so not sure what the relevance of this is either.
I just don’t see the logical consistency of claiming a business is doing super shady things to earn ridiculous amounts of profit, and then the business not doing better than SP500.
Or why insurance premiums at all the non profits would similar to premiums at all the for profits.
The more likely and simple answer is that it’s a cutthroat business, where almost all revenue goes out as expenses, and that is why all the premiums are similar, because no one can really cut more costs than they already are.
Profit goes to shareholders, not the board. The board is generally supposed to want more money to shareholders, not internal management. The incentives here are not great though, as being a board member is generally a cushy role for which one does not want to rock the boat.
However senior management generally wants to pump the stock price to get comp, not juice their salary. And to pump the stock price, they want money going to shareholders (or growth).
> And to pump the stock price, they want money going to shareholders (or growth).
Paying out dividends hasn't been a major factor in stock picking logic for at least 20 years, and rather than real growth, they'd rather pad their numbers by firing people. Shareholders get their money by buying low and selling high, not through something as quaint as long-term investment.
