SPY: about 4X
QQQ: about 6X
GOOGL: about 6X
CI: about 9X (Cigna health)
ELV: about 10x (formerly Anthem)
AAPL: about 19X
UNH: about 20X (united healthcare)
Health Insurance stocks in the US did better than tech stocks after Obamacare passed. Why?
Is this a genuine question or is it rhetorical? I can’t really tell these days.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5145008/
Short answer is that insurance companies were “limited” to 20% profits and 80% expenses by ACA.
Smarter insurance companies realized quickly that they not only had zero incentives to cut costs, but they were actually incentivized to let costs increase to be as high as legally possible, thereby increasing their profit cap in absolute dollars.
I don’t know if this was the idea of one party, a bilateral backroom negotiation with the insurance companies, or a comprehensive lobbying victory, but it ended up being a massive boon for insurance companies and hospitals and a complete shitshow for consumers.
If this part of the ACA doesn’t change, it will break the US healthcare system.
It is a competitive business without a lot of pricing power. But what it will do is provide consistent, reliable returns. And since more people are getting more healthcare, the magnitude of the profits will obviously be higher, hence the increase in stock price.
Basically, the market caps now reflects what are essentially utilities that earn ~5% profit margin on huge revenues. This was not clear in the early ACA days, but investors have obviously warmed up to them.
It seems like you’re theory-crafting here rather that describing what is actually happening in the industry.
1. I somewhat sloppily used the term “profits” in my previous post, and I should have used “gross margins”. Specifically, 80% of premium payments have to be used on healthcare expenses. Their profit (~5% as you mentioned) comes after they pay their relatively consistent operating expenses out of their gross margins.
2. The increased number of people getting insured is not what has driven up the insurance companies profits. Those numbers don’t add up.
3. The prices of name brand insurance have increased fairly consistently. It’s not competitive at all, imho. It’s an oligopoly.
4. If you know people who work in medical billing and/or you’ve known a handful of people with substantial medical bills, you will know that hospitals have increased prices for many things to ridiculous levels, and they “nickel and dime” patients at ridiculous markups for anything possible. Why? Insurance companies don’t bat an eye at these expenses any more, and they are not incentivized to do so. As money out increases via payments to providers, money in can increase via premiums, and thereby absolute gross margin can increase proportionally. If you need further proof, check out the actual prices that people pay when insurance doesn’t cover something. Miraculously, charges come down and substantial portions of the bill will be forgiven/waived.
5. Investors have warmed up to the idea that health insurance is a government-supported racket that ultimately screws people who have to pay their own premiums in part or in whole.
Note that I am a fan of most parts of the ACA, but the 80/20 rule (and the misaligned incentives that it facilitated) needs to be fixed. That said, the hospitals and insurance companies are feeding at the trough, they have established a new excessive normal, and they will fight any change to the 80/20 rule by comically pleading poverty.
>Their profit (~5% as you mentioned) comes after they pay their relatively consistent operating expenses out of their gross margins.
Just like in any other business.
>The increased number of people getting insured is not what has driven up the insurance companies profits. Those numbers don’t add up.
Their profit margin has not been driven up [0].
>It’s not competitive at all, imho. It’s an oligopoly.
In an adjacent comment [0], I posted profit margins for 7 different publicly listed multi billion dollar health insurance businesses, which excludes Kaiser Permanente. If that is not a competitive business sector, I don’t know what is. If you are claiming collusion, I would need proof.
>That said, the hospitals and insurance companies are feeding at the trough, they have established a new excessive normal, and they will fight any change to the 80/20 rule by comically pleading poverty.
How are sub 5% profit margins feeding at the trough? If that is feeding at the trough, what is Apple, Microsoft, Visa, Alphabet, etc doing?
If insurance companies had the pricing power you are claiming they have, why would the shareholders accept anemic profit margins?
It really seems like you are arm-chair quarterbacking your comments based on some quick online searches. I strongly encourage you to talk to folks who have worked in hospital billing pre- and post-ACA and (if possible) actuaries who work in the health insurance industry who will speak to you frankly (rather than toeing the industry line). The misaligned incentives are a complete shit show.
> Why is gross margin relevant?
If you can increase gross margin number while maintaining operation costs at about the same proportional level, then you end up with more absolute profit. So 100 premium, 20 gm and 5 profit can become 150 premium, 30 gm, and 7.5 profit.
> How are sub 5% profit margins feeding at the trough?
The percentage is not the issue. The absolute amount is.
Some examples:
- My premiums pre-ACA to now have almost quintupled. There are some good reasons to explain a small part of that increase (e.g., I’m older), but 4-5x is absurd. Way higher than inflation, and way higher than the quality of care has improved (for me specially, but also in general).
- This link (https://khn.org/news/article/surprise-bill-iv-push-hospital-...) is an example of hospitals feeding at the trough. Imagine this happening hundreds or thousands of times a day at every hospital. It’s absurd. I realize that this is basically a marketing piece by Kaiser, but the article is directionally correct based on folks I know who work in medicine, health insurance, and hospital billing. Their stories are all very consistent.
- There are many other countries with functional healthcare systems that do not charge anywhere near this much (for most people). Japan comes to mind. I have lived there. Premiums are based on a percentage of your salary, and the cost is much less than the US for 95%+ of the population. If you have no salary, it’s about $100 a year. When the US system reforms, I hope that the reformers take lessons from Japan since the transition from our current system to something like theirs will be relatively easier than many/most other options.
> If you are claiming collusion, I would need proof.
This isn’t CSI, and collusion doesn’t have to be explicit, especially with oligopolies.
Once the major players in any market in the US realize that they can take a win-win game theory approach to their pricing, they pretty much do so. They don’t have to have surreptitious back room meetings in order to realize that increasing prices more or less in step is mutually beneficial, especially in health insurance, which has a wide moat.
Do you expect profit margins to approach 0% over time?
> If you can increase gross margin number while maintaining operation costs at about the same proportional level, then you end up with more absolute profit. So 100 premium, 20 gm and 5 profit can become 150 premium, 30 gm, and 7.5 profit.
Sure, but because of competition, this is not happening. The premium payer will shop around and choose a different insurer offering 130 premium. If this is happening, there would be clear evidence, since all of these publicly listed companies have public financials.
> is an example of hospitals feeding at the trough.
This discussion is about insurance companies, not hospitals.
In any case, I will simply rest my case that a business with low single digit profit margins is, by definition, not “feeding at the trough”. Lots of competition, low profit margins, all lead to a pretty cutthroat business environment.
I suggest people direct their ire at drug manufacturers, healthcare providers, software providers, and others in the healthcare business with 20%+ profit margins. And increasing the supply of healthcare in general.
Or people can keep wasting energy on blaming the 3% middleman, which is beneficial for the 20%+ profit margin businesses.
Edit: final note:
> - My premiums pre-ACA to now have almost quintupled. There are some good reasons to explain a small part of that increase (e.g., I’m older), but 4-5x is absurd. Way higher than inflation, and way higher than the quality of care has improved (for me specially, but also in general).
Premiums pre ACA and post ACA cannot be compared due to drastic changes in laws about the terms is the insurance. Namely, the limitation of pricing insurance on only age/location/smoking status, and the implementation of out of pocket maximums. In addition, as of 2022, the no surprises act bill means out of network emergency costs are included in the out of pocket maximums.
Effectively, even though you feel you are getting less quality of care (and you very well might be), the insurance product is much different than before with much higher (nominal) coverage, much more expensive treatment options, and more subsidies for others in the insurance pool.
Based on aging demographics and declining labor force participation rates, I would not expect the situation to get any better. Healthcare, especially labor intensive, will cost more and more.
This analysis shows the majority of health insurers becoming less profitable after Obamacare?
https://www.commonwealthfund.org/publications/issue-briefs/2...
Considering that an out of pocket maximum did not exist prior to affordable care act, and insurers were allowed to deny people with pre existing conditions, I would expect drastically higher spending on new insureds because they would finally start getting healthcare.
Now the insurance company has to pay the hundreds of thousands and millions per NICU/hemophiliacs/cancer patients etc, so why wouldn’t their expenses go drastically higher?
I'm asking why their revenue for increased exponentially for having 10% more clients.
Not to mention that the ACA forced insurers to subsidize old people from the young (maximum age rating factor), health to sick (can only price based on age, location, and tobacco status), and imposed out of pocket maximums. All of these mean the insurance company is spending a lot more after ACA than before ACA, and all of that had to be recouped as revenue from premiums, otherwise you have bankruptcy.
Also, all the US health insurance company financials are public. You can see their profit margin is a steady ~5% for over a decade. They are spending $95 for every $100 in premiums they take in.
> Also, all the US health insurance company financials are public. You can see their profit margin is a steady ~5% for over a decade.
https://www.macrotrends.net/stocks/charts/UNH/unitedhealth-g...
https://www.macrotrends.net/stocks/charts/ELV/elevance-healt...
https://www.macrotrends.net/stocks/charts/CVS/cvs-health/pro...
https://www.macrotrends.net/stocks/charts/CI/cigna/profit-ma...
https://www.macrotrends.net/stocks/charts/HUM/humana/profit-...
https://www.macrotrends.net/stocks/charts/CNC/centene/profit...
https://www.macrotrends.net/stocks/charts/MOH/molina-healthc...
Going back to testfoobar’s comment comparing tech companies and health insurers, I do not think any investors will be impressed by health insurance companies’ low single digit profit margins compared to tech’s 20%+ profit margins.