Money Driven Medicine

“The Healing of America” author T.R. Reid explains  that until 1994 Switzerland had a health care system much like the United States, and Swiss health insurance companies were very profitable – in fact, too profitable.  In the early 1990’s Swiss health insurance got too expensive and five percent of Swiss citizens were uninsured.  This was unacceptable to the Swiss government and the Swiss people. So it was decided that health insurance companies would not be allowed to operate as for-profit businesses. The system was changed – quickly.

The recently passed health care reform law does not take profit out of American health insurance, but it does make insurance companies more like utility companies, which are highly regulated and have limits on how much profit they can make.  Starting in 2011, health insurance companies will be required to spend at least 80% of revenues (premiums collected) on medical care. This is called “medical loss ratio” (MLR). The balance of the companies’ revenue can be spent on administrative costs such as salaries, marketing, taxes – and profit.

Currently, profit margins for health insurance companies tend to be around 5%.  This may not sound like a lot until you see that UnitedHealth’s profit for the first three months of 2010 was $1.19 billion.  UnitedHealth expects its total revenue for 2010 to be $92 billion, so they are on track for a 5% profit margin totaling around $5 billion.

According to an article in Forbes magazine, UnitedHealth’s 2008 MLR was 81.5% overall and 82.7% for large groups. But for individual insurance plans, the MLR was 67.8%. (So why does individual insurance cost so much?)

Wellpoint recently reported that its first-quarter net income rose 51% over last year. (Recession?  What recession?) Earnings reached $876.8 million for just the first three months of the year.

These are just two examples of insurance companies that, together, will collect about $200 billion in health insurance premiums this year, with profits of around $10 billion. (Imagine if those profits were put back into the health care system or used to reduce premiums.)

The health care reform law, called The Patient Protection and Affordable Care Act, does not take profit out of the American health insurance system. But it may make the business less lucrative and less attractive – and it may drive some insurance companies out of certain markets.

Critics say companies will raise premiums, but I don’t think this will be politically acceptable. And if they go out of business completely….well, there’s always someone ready to step in and fill the void.

Next up:  Vive la France!

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