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Comment by izzydata | Hacker News Reader

Aren't there laws that require insurance companies and utility companies to have specific margins? They could in theory just print infinite money so they need to be reigned in by governments.

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The ACA caps insurer profitability at 20% by requiring 80% of premiums to go towards healthcare costs. Administrative / operational / marketing costs and profit come out of the remaining 20%. So, if you’re an insurer who wants to increase nominal profits, then you’re ok with spiraling healthcare costs.

https://www.healthcare.gov/health-care-law-protections/rate-...

> So, if you’re an insurer who wants to increase nominal profits, then you’re ok with spiraling healthcare costs.

Not just okay, but actively incentivized to cause it, because then you get 20% of a bigger number.

Laws like that are some of the most expensive of the perverse incentives created by naive idealists (or cynical opportunists, since the lobbyists for the medical providers know exactly what that would do).

In reality, there is sufficient competition such that the 7 largest publicly listed health insurance companies have 4% or less profit margins, and one has 6%.

I always find it funny when people on this forum act like a certain business is so powerful when it can only earn low single digit profit margins, yet tech company employees work for companies so powerful they can earn 20%+ and 30%+ profit margins for years and years.

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-group/net...

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...

You haven’t done anything but prove the GP’s point.

Their margins are necessarily low, so they should want total medical costs to increase in order for their gross profit to increase. And in fact, just checking one of them from your links, it has:

https://www.macrotrends.net/stocks/charts/HUM/humana/gross-m...

There is certainly nuance but UHC’s net income has grown from under $4B in 2010 to over $20B today.

https://www.macrotrends.net/stocks/charts/UNH/unitedhealth-g...

Nominal profits are more work to analyze since you have to figure out if UHC is selling to 5x as many customers in 2020 as they were in 2010, and then also adjust for inflation and a bunch of other stuff. It is simpler to just look at profit margin.

I agree with AnthonyMouse that a business might be incentivized, but only if the business has so much market share that they can singlehandedly drive those prices up. Or if there is collusion between all the businesses.

But the fact that there are so many publicly listed companies, and they have such similarly low profit margins, indicates they have very little pricing power.

That's their profit margin, not including the administrative overhead that counts against the 20%.

There are actual figures that don't include admin overhead and are only claims paid out vs premiums collected. It's called medical loss ratio, and just from eyeballing the charts it looks like it's around 85% for insurance companies as a whole.

https://www.oliverwyman.com/our-expertise/insights/2023/mar/...

https://www.oliverwyman.com/our-expertise/insights/2022/mar/...

That's basically what you'd expect to see if they're using the 80% as a target. They're not going to hit it exactly and it's politically disadvantageous to come in on the wrong side of the line, or for that matter to come in exactly on the line.

Much more advantageous to raise premiums and therefore profits by 400% and then be able to say that they're at 15% vs. the permitted 20%, even though the 15% would be 60% if they'd kept claims from going up.

I do not think health insurance company shareholders are interested in paying employees extra for no reason and earning less profit for themselves.

Health insurance company executives are though, aren't they? Their compensation is the "administrative overhead."

And a lot of the administrative overhead is proportional to expenses. Commissions are commonly a fixed percentage. How much it's worthwhile to spend on fraud prevention is in proportion to the size and amount of claims. So when premiums and claims costs go up, actual administrative costs go up, but shareholders and executives still prefer that to making less profit and compensation once you take lowering claims costs off the table as a way to make more money.

>Health insurance company executives are though, aren't they? Their compensation is the "administrative overhead."

Yes, and considering they health insurance company executives are not all the richest people in the US, there must exist some pressure to contain their compensation.

>once you take lowering claims costs off the table as a way to make more money.

This is a pretty big assumption. Surely, UHC/Elevance/CVS/Cigna/Humana risk losing clients if they let their costs go up compared to competitors, and hence their premiums go up, and then a competitor offers their customers lower premiums.

> Yes, and considering they health insurance company executives are not all the richest people in the US, there must exist some pressure to contain their compensation.

Sure there is. But they're also not poor, so there must be some pressure to keep shareholders from paying them minimum wage.

And if they make the shareholders more money, the shareholders will be willing to pay them more. If the way they do that is by making the same margin on a higher cost base, that also allows the shareholders to pay them more. So the incentives all line up to have higher medical costs.

> Surely, UHC/Elevance/CVS/Cigna/Humana risk losing clients if they let their costs go up, and hence their premiums go up, and then a competitor offers their customers lower premiums.

But their competitors have the same incentives.

Suppose you could lower your costs. One thing you could do is keep charging the same amount of money and just make more money, but now that's prohibited. So already we have a disincentive to lower costs right there. Maybe we don't care about this one, but this one is often combined with the second one, and the incentive to achieve the cost reduction is what enables them to do the one we actually like.

Which is to lower prices to try to get more customers. So let's say they lower their premiums by 20% and that gets them 10% more customers. If their absolute profit per customer stays the same, now they're making 10% more money -- great. But now their absolute profit per customer isn't allowed to stay the same. It has to go down by the 20% their costs went down. Meanwhile the lower premiums only got them 10% more customers, so they're losing money on net. Why would they do that?

It's like when people complain about "greedflation" and point to grocery stores gouging food prices, but then you look at the books for grocery stores and realize that they are basically running a charity the margins suck so bad.

Correct.

Insurance companies must pay 80% of all premiums directly to reimbursement. The remaining 20% is for administration, marketing, and profit.

But that's a control for premium prices...it doesn't really say anything about the costs that doctors charge.

Yes.

https://www.healthcare.gov/health-care-law-protections/rate-....

And this is a bad law.

What do you think happens when a company has limited margins? Hint: almost all companies try to make a profit (which is fine). If the margins are unrestricted, the company can cut costs to increase profit, which is a good thing. If the margins are limited, the company must raise revenue to increase profit. For an insurance company (or a utility, and California has exactly the same broken rule for private utilities), this means raising rates or premiums.

It gets worse. If an insurer raises rates, they are required to spend 80% of that money! They are required to be inefficient! If the insurer reduces their outflows by 5% by doing a good job, they lose 5% of their profits by law. So they are basically required to do a bad job.

I don't think it's a _bad law_* as much as it's an _incomplete law_. I don't know what the complete version looks like, but it would include both customer cost controls and reward innovation-based efficiency gains. Alternatively, some places have taken the approach that these are mutually exclusive and just generally removed profit from the picture entirely by socializing it.

* Health care costs were growing out of control before these laws, which seem to have slowed that trend short-term but not long-term as the industry pivoted.

IMO the most effective consumer cost control is competition. An actual, non-corrupt, free market where customers are not locked in and there are more than just a handful of providers generally results in low prices.

We do not have this in healthcare. Providers form cartels - at least in Northern California, this is so bad that the state AG is investigating (not very effectually) [0]. Customers generally can't even tell what a provider charges, so there is no price competition. There aren't many insurers, and they compete on so many incomprehensible dimensions that customers can't usefully choose. (And the most useful thing customers can look at is the network, but see the above issue with provider cartels.) Pharmacy benefits are highly corrupt and incomprehensible.

[0] We have Sutter Health, UCSF, Stanford, and Kaiser. There is very little in the way of independent providers left. Sutter Health in particular has aggressively merged with any available competition.

We do have this in a way with healthcare.gov, since the marketplace allows consumers to view multiple insurers rather than those tied to their jobs. However these plans are still pricey, I put in some dummy data with a higher than average income (60k) and got plans at 280 per month at the bottom of the barrel. Seems to me like it's a good step in the right direction but the marketplace doesn't have an actual market driving force to reduce prices even with the 11 million plans selected for 2023. Having worked in healthcare billing processing software, this lines up, insurance companies really don't give a shit about reducing prices to compete since consumers at the point of billing are always a captive audience (if you don't have it and you have an emergency, you're fucked)

Wouldn't a free market eventually lead to all these insurance companies combining into 1-2 even more mega insurance companies until there is no competition again? At least if all their profits are capped there is no reason to merge.

Let me quote myself:

> An actual, non-corrupt, free market where customers are not locked in and there are more than just a handful of providers

I’m not suggesting an unregulated market. I’m suggesting a market in which antitrust laws are aggressively enforced.

>they are required to spend 80% of that money

I know someone that worked for BCBS and they had the nicest parking garage and a park on top of the building. Always renovations being done. I believe they even bought buildings nearby in the dense part of the city. I also think this person talked about getting a bonus.

They had some high tech security along with low tech security. It was pretty impressive at the time. 24/7 security, got to use their parking garage to for some sports game on a sunday.

Or a competing insurer takes their customers by offering lower premiums. There is a reason the health insurance business earns anemic profit margins, even though they can legally earn more.

So the only way to grow profits is by increasing the base cost of service.

An insurance company can also increase the number of customers.

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