Carriers See Lower Profits Compared to Other Health Care Sectors

California’s commercial managed care health plans had an average net profit margin of 3.6% in 2011, far less than the national averages for a host of medical-related industries, according to Patrick Johnston, president and CEO of the California Association of Health Plans (CAHP). Johnston said, “Some people and organizations have misled the public about insurers’ profits…The truth is California’s health plans have a very small average net profit margin, especially when compared to profits …for others in the health care industry.”

Yahoo Finance data reveals that, while other sectors of health care had net profit margins of up to 16.7%, commercial managed care health plans spent 89 cents out of every $1 in revenue on medical care for members in 2011.

Yahoo Finance reports a 16.7% net profit margin for major drug manufacturers, 14.1% for other drug manufacturers, 13.7% for medical appliances and equipment, 13.6% for medical instruments and supplies, and 11.9% for biotechnology. Other sectors, including generic drugs and home health care, had net profit margins from 5.7% to 9.4%. Nationally, health plans’ average net profit margin was just 4.5%, according to Yahoo Finance. The only health care sectors with lower profit margins than California’s commercial managed care health plans were drug delivery, diagnostic substances, long-term care facilities and medical laboratories and research.

The Affordable Care Act and state legislation place tight limits on profits. Health plans must spend 85 cents out of every premium dollar on health care (The medical loss ratio). From the CAHP the latest and most comprehensive public filings at the California Department of Managed Health Care, CAHP found that, on average, plans surpassed the medical-loss ratio requirements; they spent 89% of revenues on medical care in 2011 and had a 3.6% average net profit margin.

Johnston said, “Even if we put together all the net profits earned by the nation’s 10 largest health plans over the course of an entire year, we would only be able to cover the costs of three days of national medical expenditures. Health care costs will continue to climb as we move forward with the Affordable Care Act. Health plans remain steadfast in their commitment to effectively expand coverage and implement the Affordable Care Act. But we recognize that insurance taxes, more benefit requirements, limits on geography-based pricing and age rating restrictions will ultimately add to the cost of health care coverage.”

The net profit margin is the most accurate way to measure health plans’ profits, especially when state and federal law require them to spend 85% of their premiums on medical care, said Johnston. Some health plan critics have tried to confuse the public by citing health plans’ return on equity figures, rather than measuring net profit. The two numbers cannot be used interchangeably. The net profit margin measures the percentage of each premium dollar that is left after paying for medical care and other expenses. Return on equity measures how efficiently a company uses shareholder funds and may include other businesses and activities unrelated to the coverage offered by a health plan. CAHP reviewed data on all commercial plans in California, including nonprofit plans, which refer to revenue in excess of their expenses as net income or surplus. CAHP is a statewide trade association representing 39 full-service health plans. For more information, visit www.calhealthplans.org.

Last Updated 8/2/2017

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