Why Is Health Insurance So Expensive?

The seven largest American health insurance companies totaled over $265 billion in revenues in 2009.  If 20% of these revenues are spent on things other than paying medical bills for people insured by these companies, that amounts to approximately $53 billion.

Administrative costs for these companies should be around 5% of revenues, leaving 15% for marketing, sales commissions, and really big executive salaries.  That results is a $40 billion expense that Americans must add to their health insurance costs – a cost that no other country imposes on its citizens.  This is one reason our health care system is so expensive.

Correction: In my recent post on health insurance companies becoming more like utility companies, I wrote (incorrectly) that two insurance companies together would have two trillion dollars in revenue in 2010.  The correct amount is two hundred billion dollars (projected for 2010).  Sorry about that mistake.

According to Fortune 500‘s 2010 list, the top seven health insurance companies in terms of overall revenues for 2009 were:

1. UnitedHealth Group – $87 billion
2. WellPoint – $65 billion
3. Aetna – $34.7 billion
4. Humana – $30.9 billion
5. Cigna – $18.4 billion
6. Health Net – $15.7 billion
7. Coventry Health Care – $13.9 billion


Stephen Hemsley – UnitedHealth Group

Total 2009 Compensation: $8,901,916

Compensation breakdown:

  • Base salary of $1,300,000
  • Stock awards of $4,122,694
  • Option awards of $1,442,306
  • Non-equity incentive plan compensation worth $1,950,000
  • “Other compensation” including company matching contributions for a 401(k) plan and company matching contributions under an executive savings plan valued at $86,916
Total 2009 Compensation: $6,509,452

Jay Gellert – Health Net

Total 2009 Compensation: $3,643,342

Compensation breakdown:

  • Base salary of $1,200,000
  • Non-equity incentive plan compensation worth $1,587,600
  • Change in pension value and nonqualified deferred compensation worth $767,347
  • “Other compensation” including use of a corporate aircraft, personal use of corporate vehicles and company matching contributions for a 401(k) plan valued at $88,395

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15 Responses to "Why Is Health Insurance So Expensive?"

  1. ralfie1 says:

    If it’s so profitable how does Medicare deny 50% of claims and still lose money?

  2. medicareblogger says:

    Now where did you get that 50% number?  I have been working with Medicare beneficiaries for four years and have never heard of a claim being denied.  I recently wrote on my blog about a discussion with my doctor who told me that Medicare – unlike insurance companies – does not deny claims or delay payment.   I’d be very interested to know where you got this number. Please be aware that the internet is awash in misinformation.

  3. Yarrl Nahguav says:

    Ralfie must be a teabagger and we all know how much misinformation they are responsible for. 

  4. John Davis says:

    ralfie pulled that number out of his rear end.  He heard it somewhere and then added a few percentage points to it and quoted it.  Excuse the ignorant of this deed.

  5. dr says:

    You did a super job of posting revenues, but that is only half of the equation. How about the part that eats away at the revenue stream, expenses?
    For example,  legal expenses for the insurance companies and the physicians, who have to practice defensive medicine or risk the possibility of being sued.  Or something as innocuous sounding as paperwork (administrative costs), which is estimated to cost on the average almost $1,100 per person.
    You could also make a case that insurance companies do not have to fully compete to provide their services.  No competition means higher rates.  Insurance carrier A might have to compete with insurance carrier’s B, C, D and E in one state but only with carrier B and D in another state, but the playing field is not level across all 50 states (or are there 57?).  If the same rules were applied across our great country, all insurance carriers could compete for the contracts.
    Your column does point out exorbitant costs and perhaps frivolous spending by the carriers who do it because they can.  Opening up the markets across state lines would help to force carriers to curtail these costs and the end result would likely be a more competitive market, by  forcing insurance carriers to operate more efficiently in order to cut their operating expenses.  This would result in lower insurance rates.

  6. medicareblogger says:

    If you look at my earlier post on “The Healing of America”, I talk about this book that points out how other countries have avoided the the expensive administrative costs involved in the American health care system such as: providers dealing with hundreds of insurance companies and forms; lack of electronic records;  nationwide plans; and low malpractice insurance costs.
    I agree with you about the lack of competition in the health insurance market, but I don’t know about “selling insurance across state lines”.  Arizona is a relatively low-cost state when it comes to medical care.  Should we have to share the costs of more expensive states like California, New York, and Florida? Most of the states in the Northeast have very high standards for health  insurance.  Would we have to meet their standards here in Arizona, thus driving up costs here?  Maybe the changes in the health care law make this last question moot.

  7. Randy L says:

    It’s expensive because your payment is a subsidy for those who have worse health than you do.

    Wait until the full force of the new health law hits. Think you’re paying alot now?

  8. medicareblogger says:

    No, Randy.  American health care is expensive because those of us with insurance are paying for the cost of the uninsured.  When everyone is paying into the system, premiums should go down.  However, because our system is so messed up and inefficient (as described in my recent posts), costs will continue to rise.  Unfortunately, the changes that have been made under the new law did not address a fundamental flaw in our system:  profit-driven medicine and hundreds of insurance companies.

  9. Wow they make this much money and yet they turn down more then 50% of there applicants. That’s insane.

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