Fact-Check: Insurance Company Profits

[naked gent]

No, it most certainly is not. The insurance industry is massive, so massive in fact that the dollar amount is inconsequential. (just as it is in the oil industry) So, of COURSE there's going to be a lot of money, but it must be viewed in terms of their TOTAL REVENUE. It does not matter if they have X amount of profit if they're spending X times however many tens of billions on care.

None of that has anything to do with their actual profits

It is disingenuous at best, and flat out deception at worst, for the speaker to claim that they're making outrageous profits without noting that they spend outrageous amounts to get there, and the amount of money that they put back into the system.

If someone is being disingenuous here its you and not The Speaker. Looking at the title of the thread you are supposed to be talking about profits but I'm not sure you understand the concept.

For your edification: http://www.investorwords.com/3880/profit.html

The positive gain from an investment or business operation after subtracting for all expenses.

I don't see anything there concerning the amount of investment required to obtain the profit or about the return on the investment. Pelosi is using the word correctly while you are attempting to cloud the issue by conflating profits with profit margins.

Yes... and no.

If I have a business that is so massive that a mere 0.5% profit margin brings me $4 billion in a year, that's "lots of profit", but it is also low in profitability. Profitability means good return on investment, not just dollar amounts; in that business, investors would be getting lousy dividends, if any.

Sorry kuli but you're wrong too. I agree with you on the low return on investment but thats profit margins not actual profits. And you can't pay dividends with profit margins you need actual dollar profits in order to pay out the dividends and the better your cash flow (regardless of margins) the more you can afford to pay out in dividends.

In the real world today many companies who pay out large dividends are mature companies with low margins and great cash flow like oil companies.

And profitability does not mean a good return on investment it simply means the ability to generate profits.

If we were going to determine the value of any given business the first number you'd look at is absolute profits, after that you would look at profit margins and while both will play a role in determining value the first will play a far larger part than the second.

 

[Kulindahr]

Sorry kuli but you're wrong too. I agree with you on the low return on investment but thats profit margins not actual profits. And you can't pay dividends with profit margins you need actual dollar profits in order to pay out the dividends and the better your cash flow (regardless of margins) the more you can afford to pay out in dividends.

In the real world today many companies who pay out large dividends are mature companies with low margins and great cash flow like oil companies.

And profitability does not mean a good return on investment it simply means the ability to generate profits.

If we were going to determine the value of any given business the first number you'd look at is absolute profits, after that you would look at profit margins and while both will play a role in determining value the first will play a far larger part than the second.

How the heck can you pay out good dividends when you have a low profit margin? Go into debt?

I regularly read articles about dividends being slashed due to fallen profits. That means as margins shrink, dividends go down.

You can't pay dividends out of thin air.

 

[JB3]

How the heck can you pay out good dividends when you have a low profit margin? Go into debt?

I regularly read articles about dividends being slashed due to fallen profits. That means as margins shrink, dividends go down.

You can't pay dividends out of thin air.

Yeah, I'm not quite sure where he gets his economic knowledge from.

 

[palemale]

I should note that I am not trying to exclude executive pay because of its lack of value as a discussion point;

I wish to exclude it because this article makes no mention of it, and as such there is no 'jumping off point', so to speak, for a discussion of it.

If someone would like to find another article that discusses that, I do think it would be a valuable topic to discuss in another thread.

Droid, the problem with the article that you site is that the writer relies on profit margins to criticize Speaker Pelosi, Rep. Van Hollen and a Moveon.org ad, all of whom speak about "profits," not profit margins. Rule #1 (or at least 2 or 3) in debating is that the parties must define their terms. It would have been helpful if the writer had defined his terms, or argued that profit margins are a better gauge than simple profits in determining whether it is fair to criticize the health insurance industry, and explained why.

As a general proposition, however, what does it matter that a few industries had a larger profit margin than health insurance? It doesn't detract from the argument Pelosi, et al, made. It doesn't mean they don't make obscenely high profits. It would appear from the article that the health insurance industry has a higher profit margin than almost any other industry, with the exception of the few mentioned in the article. So not sure it adds much to the debate.

 

[JB3]

It would appear from the article that the health insurance industry has a higher profit margin than almost any other industry, with the exception of the few mentioned in the article. So not sure it adds much to the debate.

Actually that's not correct. Their profit margin is at least 50% below the average, especially for an industry their size.

 

[MystikWizard]

I just wanted to very quickly post the CEO pay of executives from 2008.

Ins. Co. & CEO With 2008 Total CEO Compensation

Aetna, Ronald A. Williams: $24,300,112

Cigna, H. Edward Hanway: $12,236,740

Coventry, Dale Wolf: $9,047,469

Health Net, Jay Gellert: $4,425,355

Humana, Michael McCallister: $4,764,309

U. Health Group, Stephen J. Hemsley: $3,241,042

Wellpoint, Angela Braly: $9,844,212

http://www.healthreformwatch.com/2009/05/20/health-insurance-ceos-total-compensation-in-2008/


It should be noted that Family Practice physicians make less than a year than a CEO makes in a week.

Also, Mr. Williams pay from Aetna essentially equates to one $461,000 house per week.

 

[Kulindahr]

Droid, the problem with the article that you site is that the writer relies on profit margins to criticize Speaker Pelosi, Rep. Van Hollen and a Moveon.org ad, all of whom speak about "profits," not profit margins. Rule #1 (or at least 2 or 3) in debating is that the parties must define their terms. It would have been helpful if the writer had defined his terms, or argued that profit margins are a better gauge than simple profits in determining whether it is fair to criticize the health insurance industry, and explained why.

The problem with Pelosi and co. is that they give the impression of some entity raking in piles of bucks. In reality, there are hundreds, if not thousands, of entities (there are two dozen just in a single health insurance investment fund looked at a while back). They're also being misleading in that many Americans will be even less knowledgeable than we here on the matter of profit v margin. A great number of people think of getting large profits as a matter of getting lots of money with little effort, and that hardly applies to the health insurance field.

And besides that, when she talks of wanting to get in on some of that action, what she's really saying is that she wants to make things tough for all the retirement and other plans out there with this kind of stock in their portfolios.

 

[JB3]

I just wanted to very quickly post the CEO pay of executives from 2008.



http://www.healthreformwatch.com/2009/05/20/health-insurance-ceos-total-compensation-in-2008/


It should be noted that Family Practice physicians make less than a year than a CEO makes in a week.

Also, Mr. Williams pay from Aetna essentially equates to one $461,000 house per week.

Huh. That's actually less than I expected. Certainly less than other similar industries.

 

[Kulindahr]

I just wanted to very quickly post the CEO pay of executives from 2008.



http://www.healthreformwatch.com/2009/05/20/health-insurance-ceos-total-compensation-in-2008/


It should be noted that Family Practice physicians make less than a year than a CEO makes in a week.

Also, Mr. Williams pay from Aetna essentially equates to one $461,000 house per week.

It wouldn't affect the profits, but in terms of feeding on public outrage, Pelosi would do better to be fighting for a new tax bracket above the others.

Marginal Tax Rate[3] Single
10% $0 – $8,350
15% $8,351– $33,950
25% $33,951 – $82,250
28% $82,251 – $171,550
33% $171,551 – $372,950
35% $372,951+

I can't see why she isn't looking at those CEOs and saying, let's have a few new brackets:

37% $500,001 - $720,000
42% $720,001 - $1,000,000
50% $1,000,001+


But Pelosi's problem isn't with the profits as such anyway; she's interested in appearances. Now, anyone want to go look and see what she got in donations from health insurance execs in the last few years?

 

[Kulindahr]

Huh. That's actually less than I expected. Certainly less than other similar industries.

Some were less than expected. The top one was obscene: one week of his income could set me up for life.

 

[JB3]

http://www.opensecrets.org/politicians/summary.php?cycle=2008&type=I&cid=N00007360&newMem=N

 

[naked gent]

How the heck can you pay out good dividends when you have a low profit margin? Go into debt?

Low profit margins are not an indicator of cash flow. They are different terms and refer to different metrics. As even Droid has mentioned oil companies, like insurance companies, have low profit margins yet they pay some of the highest dividends in today's stock market.

That is an example of low profit margin high dividend companies and how they do it is very simple they make lots of money.

I regularly read articles about dividends being slashed due to fallen profits. That means as margins shrink, dividends go down.

You're shifting your argument here. Yes if margins and profits fall dividends may be cut but thats not what we're talking about. The subject here is how are profits determined by the actual total dollars earned or by the return on investment and as the definition above clearly states its the former not the latter.

Who can pay a better dividend Kuli company A which generates a 3 billion dollar profit although their profit margin is only 4% or a company with a profit margin of 50% but actual profits of only 500 million?

Yeah, I'm not quite sure where he gets his economic knowledge from.

I paid attention in Business 101 unlike you and the author of the linked article who appears to have spent their time in the campus bar instead of business class.

I provided you with a definition of profits above which supports Pelosi's use of the word and contradicts they way you are using it rather than wonder where I get my economic knowledge from why don't you provide me with a definition which shows me I'm wrong.

 

[Kulindahr]

Who can pay a better dividend Kuli company A which generates a 3 billion dollar profit although their profit margin is only 4% or a company with a profit margin of 50% but actual profits of only 500 million?

Insufficient data.
The size of the dividend depends on the number of shares. If one assumes that the number of shares is proportional to the value of the company, then the company with the greater profit margin will pay the greater dividend.

The only way it could be otherwise is if one company decides to turn a greater portion of their profit into dividends, or goes into debt to pay dividends.

I provided you with a definition of profits above which supports Pelosi's use of the word and contradicts they way you are using it rather than wonder where I get my economic knowledge from why don't you provide me with a definition which shows me I'm wrong.

And Pelosi is being misleading.

 

[naked gent]

Insufficient data.
The size of the dividend depends on the number of shares.

Thats a fair point so lets say both companies have the same number of shares outstanding, if that were the case which one could afford to pay the larger dividend?

And Pelosi is being misleading.

OK now that you've stated she's being misleading can you tell me why she's being misleading?

 

[Kulindahr]

Thats a fair point so lets say both companies have the same number of shares outstanding, if that were the case which one could afford to pay the larger dividend?

The one with the greater profit, obviously. But if they have the same number of shares outstanding, then they're probably equivalent in size and that means that it's also the one with the greater profit margin.

OK now that you've stated she's being misleading can you tell me why she's being misleading?

Already done, above somewhere.

 

[naked gent]

Already done, above somewhere.

Well if it was done it was done by those who are not using terms as they are defined.

The link above began with the word 'profitable' then quickly switched to profit margins which is the point they were trying to make. Had people here been as quick to make the same switch I would not have even posted in this thread.

Pelosi said insurance companies make huge profits......by definition they do.

 

[JB3]

Well if it was done it was done by those who are not using terms as they are defined.

The link above began with the word 'profitable' then quickly switched to profit margins which is the point they were trying to make. Had people here been as quick to make the same switch I would not have even posted in this thread.

Pelosi said insurance companies make huge profits......by definition they do.

No one's disputing the dollar numbers. OF COURSE they're going to have large profits, because the health insurance industry is GIGANTIC. What we're disputing, and what you can't seem to understand, is that the dollar number is inconsequential when you look at their amount of profit compared to their revenue. They are not making huge profits for their revenue. In fact, for any other industry these companies would look to be in trouble because of how little profit they do rake in.

 

[hotatlboi]

It's not just about executive pay, but the point made is a good one. It is most certainly partly about COSTS. Just looking at profit margins will NOT tell you the whole story.

The article says premiums have nearly doubled but profit margins have only increased slightly. That means costs have increased a LOT. The question is, which of those costs were justified, which the article provides no data on.

They could have doubled everyone's premiums, doubled all their salaries (which would be expensed as costs), and had the same profit margin.

If most/all of the increased costs were caused by increases in costs for delivery of health care, or by adding additional payouts, that's fine, but I haven't seen any hard data on that.

 

[palemale]

Droid, not sure what your point is. Is it that the health insurers are providing an important service, doing it in an efficient and honest way and should be left alone?

 

[naked gent]

AP does a relatively fair fact-check of claims that the insurance industry makes an obscene amount of profit, as has been a popular theme in the healthcare debate.

No one's disputing the dollar numbers. OF COURSE they're going to have large profits, because the health insurance industry is GIGANTIC.

Apparently Droid you were disputing the fact that the health insurance industry made obscene profits when you began this thread. I'm glad, and feel good, about educating you that you now concede that they do make huge profits.

What we're disputing, and what you can't seem to understand, is that the dollar number is inconsequential when you look at their amount of profit compared to their revenue. They are not making huge profits for their revenue. In fact, for any other industry these companies would look to be in trouble because of how little profit they do rake in.

Rule one in business is that dollar amounts are never inconsequential. I understand the point you were trying to make its just that your focus is wrong. You concentrate too much on margins and not enough on profits. The companies in question do not make "little profit" and if one of them were to be bought out by another they would fetch a price far far higher than YUM brands which makes less than 500 million per yr.

When you try to determine the price you are willing to pay for a company I say earned profits matter more than anything else........can we agree on that?