Firstly, I feel I have to define "corporation" for those who falsely personify these entities. To paraphrase Robert Reich, one of my favorite economic writers, a corporation is nothing more than a collection of contracts designed to compensate financial and labor contributions for the financial benifit of those involved. It is a social subset functioning to benefit those within the corporation by selling something to the rest of society. Social subsets come in all forms, from communities, to cities, to states, to countries, to coalitions of countries. Generally speaking, the formation of social subsets are beneficial to society as a whole as long as a subset does not take from or dictate to other subsets. As long as some equilibrium of power is maintained (in the case of corporations, through regulations preventing trusts or monopolies) they benefit society as a whole.
Now, what does this have to do with medical insurance companies you ask? Primarily because they are the only industry who has an exemption from the anti-trust and monopoly regulations, in the form of the McCarran-Ferguson Act of 1945.
To the question of whether or not the health insurance companies are the sad pandas they claim to be!
In short, no. To understand the financial statics numbers they've thrown at the public (which suggest what they claim), you have to review their income statements to verify these claims.
We can start with United Health.
http://finance.yahoo.com/q/ks?
United Health has an operating margin of 7.33% and a profit margin of 4.2% (that means they show their fixed costs amount to only 3.13% of income). This raises warning flags on just a glance! It brings into question their numbers when they are this far skewed. It is akin to someone owning several multimillion dollar homes but claiming they only had $20,000 in taxable income on their tax return.
If you look at UNH's income statements, the only fixed cost they list is for taxes, so they have labor, supplies, utilities, buildings, etc all listed as CoGS, pushing their operating margin far lower than would normally be seen in a company (as most of those things are normally listed as expenses). So, basically, the warning flags were right, they are playing accounting games. I mean, I have trouble understanding why advertising and all of labor costs can be lumped into CoGS, unless you are trying to artificially deflate your operating margin.
So, if you dig into the numbers, here's what you find for United Health:
Revenue = 21.7b
Medical Claims Expenses (what they paid out) = 16.1b
So, for a normal company, this would be a 25.8% operating margin. It is all how you sort the numbers.
Cigna is probably the worst of them all. Just taking their CEO into account, it is obvious that something is going on. Cigna's CEO had a salary of $1.1m in 2007, plus a bonus of 21m, plus about 32m in perks, plus about 10m in company stock. Not a bad income, considering claims denials skyrocketed while premiums went up that year. In 2008, his bonus was only 12m, the rest was about the same. As a comparison, Jack Welch (one of the most compensated CEOs) made $16m in salary and bonuses his last year at GE, plus another $15m in stock. That's not even half of the Cigna CEOs income. Besides that, GE increased revenue and profits under Welch, but Cigna's revenue has barely budged while its profits went up slightly under Ed Hanway. Most notably, GE is 15x the size of Cigna. Overcompensated much? Looking into the artful way the financials have been obfuscated under his leadership, it becomes clear exactly why he's making the money he has been paid.
http://finance.yahoo.com/q/ks?
In 2008, Cigna's breakdown was like this:
Total Revenue = 19.1b
Medical Claims Expenses (what they paid out) = 7.25b
So, for a normal company, this would be a 62% operating margin. But they show an operating margin of only 5.31%.
It is all how you sort the numbers.
Now, to look at their (supposedly) dismal profit margins. In finance, a profit margin is only a good indicator when the company's goal is to make it as large as they possibly can. It is not exactly a good judge of how profitable a company is, specifically when a company is trying to make it a small number. Both of the insurance companies I picked to review income statements are hiding a large chunk of their profits by investing the money. This is apparent when you look at their return on investments line item. United Health has almost 10% of its revenue coming from its investment portfolio in 2008, Cigna was about 5%. This was in a year where the investment portfolios of most people had flat-lined or tanked. Looking at their balance sheets, both companies are sitting on a literal mountain of investments. Silly me, I thought they were in the business of providing health insurance, not running investments.
Bottom line - they saw this coming and have clearly prepared their books to obfuscate what is really going on. However, with a little finance knowledge, their sob story quickly unravels.
