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via  RJ Eskow: Why Did Health Insurance Stocks Go Up After The President’s Speech?

Insurance companies have been in the spotlight because of the reform efforts, of course, and there are two distinct camps evolving in the debate. The one on the left that decries that the health care industry is making huge profits and needs more competition, and the one on the right that says the left is misleading the public and the profits are actually quite small.

To begin with, the for-profit health industry received some good news from the President Wednesday night. President Obama has embraced the issue of mandatory health insurance. This will add millions of new customers to the health insurance industry.

The President gave a speech last night that was exciting, stirring, and unapologetic in its defense of government activism. He singled insurance companies out for special criticism, gave a convincing argument in favor of the public plan option, and forcefully stated that a health reform bill can and will be passed this year.

So why did health insurance stock prices go up the next day?

The President has embraced Hillary Clinton’s campaign promise saying that “under my plan, individuals will be required to carry basic health insurance.” Now he favors mandating insurance coverage much like auto insurance. The obvious question here is how will this effect the insurance companies’ revenues. Shareholders are buying insurance stocks in anticipation of greater profits.

This news can only hurt the argument that insurance companies suffer through some of the lowest profit margins in America. Mr. Eskow continues:

Marcy Wheeler of Firedoglake and Ezra Klein of the Washington Post have been engaged in an enlightening exchange about the role of for-profit insurers in the US health care system. After Marcy rebuked Ezra over insurance companies, Ezra responded with a thoughtful and detailed response, which focused on the fact that health insurance ranks only 86th in the list of most profitable industries, with an average profitability margin of 3.3%. With relatively slim margins, he suggests, trimming the “profit” out of health care won’t put that much back into the system.

A valid point, but somewhat overstated. For one thing, profit margins are calculated only after administrative expenses are paid. That means, for example, those exorbitant salaries and cash bonuses you’ve read about are excluded from the 3.3%. And while Ezra makes some excellent points about overstating the administrative cost differences between public and private plans, the fact remains that marketing costs add a huge cost burden to the system. (Putting everyone in an Insurance Exchange could reduce that significantly, even if we continue to rely on private insurers.)

The 3.3% figure that Ezra Klein quotes is an average of the industry and reflects net earnings, pure profits after taxes, salaries, claims paid, etc. The right loves these low percentages because they immediately produce sympathy. They go as far as to measure profits against total health expenditures to make the profit margin seem even smaller. But what the right’s argument glaringly omits is what this means in actual dollars.

According to Forbes 500, under one of their charts at Industry: Health Care: Insurance & Managed Care, we can take A Second Look at the numbers. In 2007, UnitedHealth had revenues of $71.5 billion. Their bottom-line profit was $4.25 Billion, or 5.8% of revenues. Agreed, that is a small fraction of revenues and is slightly higher than the industry average of 3.3%, but still, we can’t loose sight of what these figures mean. UnitedHealth made over four billion dollars profit after all expenses were paid including some lavish salaries for executives and advertising and marketing.

How did they make that much money? They made four billion dollars by turning down treatments for pre-existing conditions and by turning down those treatments that some staffer deemed as “not medically necessary”. They made four billion dollars by raising everyone’s premiums.

The left’s argument that the public option will bring much needed competition holds. The right’s attempt to downplay profits by using a percentage of revenues is easily debunked. Making a profit – any profit at all – on insurance premiums and betting on healthy people to pay is immoral and should be regulated down to less than 3.3%. Right now, zero profit sounds just fine.