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Comment by ch4s3 | Hacker News Reader

Health insurers in the US have a cap on how much of premiums can go to profits.

Doesn't that just mean that they have an interest in keeping these costs high? The higher the costs, the larger that % is for the in absolute dollars.

If all the costs come down, they are allowed to make less money.

Bingo. This is why they loved the ACA. Only allowed one scoop of ice cream? Great I'll use an enormous scoop.

That enormous scoop results in 5% or less profit margins.

Compare to tech companies’ profit margins.

So? They're insurance companies. Why should they have high profit margins?

I never wrote they should. I am disputing the notion that they earn huge profits (“enormous scoop”). Which is trivially disproven by looking at their financials.

How is it disproven exactly? Are you saying 5% is not a lot because it's the number 5 or something?

From experience operating businesses and reading financials of various companies, 5% profit margin is on the low end. Walmart and other retail play in the 2% to 5% range.

Why would you compare such different businesses profit margins?

Anyway I just think saying a 5% profit margin is small because other businesses have larger profit margins is kind of naive. I mean if through competition insurance companies' profit margins dropped to 2%, then the current status quo of 5% would seem crazy.

It's all just a matter of perspective. Saying 5% is low because other businesses have higher profit margins doesn't make much sense since the businesses are totally incomparable.

The reason to compare it to other businesses is to see what kind of moat/regulatory capture/monopoly/monopsony power they have.

For those purposes, a 5% profit margin indicates that health insurance companies do not have the pricing power that many other industries have. They actually have some of the lowest, which is fine, but then the claims of them being in control go out the window.

Whether or not 5% itself is too high can be determined by looking at the competition. There are at least 7 other major publicly traded health insurers competing against each other, all with nearly the same profit margin.

So either they are colluding with each other and there is corruption on a massive scale, or, the current parameters of the health insurance business simply result in a ~5% profit margin. If you think you can do better, then you are betting that you can do the job better than all the employees at these 7 companies, which is a lofty claim.

S&P 500 average profit margin is typically around 10%. So, yes, 5% is low profit margins.

I already said it elsewhere, but I think blindly comparing profit margins across totally different industries is kind of dumb. But continue to compare insurance companies to Apple if you'd like.

The "enormous scoop" refers to their incentive to drive prices higher so their "scoop" (the 5%) is bigger in absolute terms, I believe.

My point was that if they could control the size of the scoop, then why would they limit it to 5%, when they could legally be getting 15% or 20%?

Answer is that they do not control the size of the scoop (as the original poster I replied to implied).

Yes, this is one of the more unfortunate unintended consequences of the ACA.

"unintended"

Insurance companies wrote the bill.

Parts of it, but it’s not clear that MLR was one of those parts or even a net positive for insurers.

Insurance costs were increasing at a higher rate each year before the ACA was passed or went into effect.

The rate of growth didn’t go negative or to 0, it just slowed down.

Correct

It may have been unintended but it was defiantly not unknown, I remember people pointing out this exact problem during the debate around ACA.

Are you implying that before ACA, insurers had an incentive to keep costs low?

Yes. Although painted by reactionaries as a communist plot, ACA was modeled after Massachusetts’ “Romneycare”.

It’s typical old school GOP policy of leveraging private sector actors with public sector dollars. It’s not awful policy, but did create bad cost incentives and encourages cartel like health networks.

It’s called Romneycare because he got it implemented as a lightweight alternative to a pending proposal for more universal coverage.

It’s also similar in nature to the Swiss system. Not a lot of GOP voters in Swiss cantons.

You don’t need to be a reactionary to see that it was very poorly written and that the implementation was even worse.

In a vacuum, that would make sense, but most of these insurers still have to compete with at least one or two other big players.

So while you could increase your costs so that you can increase your premiums thus getting 5% of a larger pie, that assumes that you can increase your premiums without losing customers to competitors.

For the most part, on the ACA marketplace, all the plans are pretty similar, so price is really your main differentiator.

Perhaps the obstacles of switching providers makes this competition less of an issue.

Yes, I agree that price controls set by the state are a bad idea.

That's a meaningless cap because you can decrease profits at will by increasing inefficiency and unnecessary costs inside the company.

It’s called medical loss ratio (MLR), and insurers are required by law to spend 80-90% of premiums on medical care.

They can get there by overpaying for care or by refunding money/charging less. But they can’t get there with increased internal administration spending.

IIRC, it's 15%, meaning that they can only have $675,000,000,000.00 in profits.

That is $675,000,000,000.00 they can take from us and instead of using for healthcare or even healthcare administration, it's just additional money that they took.

> it's just additional money that they took.

When did they take it?

All the 10-Ks are showing me 5% or less profit margins.

They have low profit margins, but they massively overpay for the care, meaning that it's still incredibly inefficient.

How are you determining they massively overpay for the care?

By comparing to the prices paid for comparable care in other countries. And also by comparing what US hospitals charge insurers vs what US hospitals charge cash payers.

Overpay means getting being able to get a better deal than you did. If it is 1 hospital in a 100 mile radius telling an insurance company to take it or leave it, how is it overpaying?

Prices paid in other countries are irrelevant due to numerous factors, such as cost of living, purchasing power of local currency, legal liabilities, and most important, whether or not it is taxpayer funded healthcare which means all sellers are dealing with 1 buyer, which is the nearly the exact opposite of the US, where it is all buyers dealing with 1 seller (hospital or drug manufacturer who owns the patent).

The problem with this approach, even before the ACA was passed, is that if you have a maximum profit fraction, the way to maximize profit in absolute terms is to just charge more and spend more - it encourages absolutely the wrong behavior in terms of costs management.

It seems like the cap should be unnecessary in the near future if we have full price transparency.

Premiums are not the only source of revenue insurers have.

Would you like to provide a positive statement that coincides with this negative one?

Copays, deductibles, revenue from providers, etc.

The copay goes to the healthcare provider, not the insurance company. That’s why it’s called copay: You are jointly paying the provider alongside the insurance company.

A deductible is an amount of care that you’re solely responsible for. None of that money goes to an insurance company.

It this a windfall profits tax?

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