Wednesday, August 10, 2011

The Big Lie About Health Insurance Companies and Executive Compensation

We were visited this week by my wife's brother and his wife and in the course of the many conversations we have had we were at one point subjected to the classic "health insurance companies are evil and their executives are greedy crooks who raise premiums to line their pockets" meme. My brother-in-law, of course, knows that my wife and I work for the biggest, baddest, most evil healthcare company of them all. And I know, of course, that he is just repeating what he has been told by the liberal media and elites without actually doing the math. But still, he believes it, and neither my wife nor I had a chance to offer a rebuttal. So I thought I would do it here.

Now, before I start, I want to lay some groundwork. I know that executives in healthcare companies, like many industries, make a boat load of money. Our chief executive last year earned $1.3M in salary, $3.5M in bonuses, and $6.0M in stock and option grants, for a total 2010 compensation of $10.8M. That is a LOT of money. We can debate whether or not his and other executive's compensation is deserved. (We could have the same debate about athletes, movies stars, most of the members of congress, of course the President, and, oh, btw, tv news anchors(1).) But that isn't the accusation being leveled by my BiL. The specific charge is that health insurance company greed in general, and executive compensation in particular, are a DIRECT cause of premium increases.

So, I set out to determine exactly what contribution executive compensation makes to premium cost. I looked at the top executives of our employer because, as mentioned before, we are the biggest healthcare company of them all in terms of revenue and therefore, presumably, are the biggest crooks of all when it comes to compensating our executives on the backs of the little people we insure. I also looked at the general financials of our company to see if we really are gouging our customers to pad our bottom line. Below are the results. (Click on the chart to see it full size.)

As you can see in the chart above, if we were to completely eliminate the compensation of our top 5 executives and use that savings to reduce premiums, we would be able to reduce premiums by only 4/100ths of a penny per dollar of premium or roughly 4 cents per hundred dollars.

But total compensation doesn't paint the correct picture. Stock and Option grants are not taken out of revenue and therefore have zero impact on premiums charged. The correct analysis involves only salary and cash compensation, i.e. executive "pay". If we take this metric against revenue, we see that eliminating all executive "pay" would amount to only a 1/100th of a penny reduction per dollar of premium or 1 cent per $100 dollars, or even more dramatic, just a dime per $1,000 of premium. The fact is, the money we pay to our executives is a very small fraction of a percent of premium dollars and in no way influences premium increases.

Of course, I know this to be true already. I work in finance and see exactly how premium dollars are spent. Look at the item in the chart labelled Medical Loss Ratio (MLR). This is the amount of premium dollars that goes directly out to paying members' medical bills. It is around 80%, and has remained consistently in that range year over year(2). When we do analysis to support rate renewals, this is the item that we focus on. Premium increases (or decreases) are directly proportional to the movement of MLR year over year. The fact is that any increases in premiums that we issue are A DIRECT RESULT of increases in medical costs that we must pay out.

And what of the charge that we hoard all those premium dollars to increase our profits? Well, as again can be seen in the chart, our profit margin for 2010 was 5.4%. I think anyone would agree that this is a very modest profit. In fact, profit margins in the 4-6% range are the norm across the entire health insurance industry. The fact is that the health insurance industry is one of the most competitive, least profitable industries(3) in this country. We simply can't raise premiums to pad our profits for if we did, we would get outbid for business.

The liberal media love to throw out whole dollar amounts to shock people into thinking that health insurance companies and their executives are robber barons. I'm sure if ALL you ever heard was that United collected $85 BILLION in premiums or made $4.6 BILLION in profit, or that its chief executive made $10.8 MILLION in compensation, you would be shocked. And without being told what those dollar amounts were as a percent of revenue, you would be inclined to think that my employer is indeed the epitome of evil "big business" greed. But I implore you, before you jump to conclusions based on the slanted stories you read and see: "do the math". Yes, those are large dollar amounts. But are they a result of gouging our customers? Absolutely not.

(1) Bill O'Reilly and Keith Olbermann made apx the same amount in 2010 as Steve Hemsley, President and CEO of UnitedHealth Group. The next time one of these "news" anchors goes on a rant about evil greedy corporate executives, ask yourself who has earned their salary more: some bloviating tv talking head or the head of a multi billion dollar international company responsible not only for helping manage and deliver care to 75 million Americans but also watching over and guiding the 80,000+ employees who serve those Americans.

(2) The federally mandated MLR in ObamaCare is 85% for large group insurance, and 80% for small group and individual insurance, and we are currently restructuring our products to meet that guideline. Still, this increased MLR over the 80% "norm" in the industry will cause many, many people to actually LOSE their insurance coverage because, frankly, companies can't remain profitable at an 85% MLR. We are big enough to survive and absorb the increased hit to our finances. But this change will cause some health insurance companies to go out of business (it has begun already) and others to terminate some plans and members.

(3) In the most recent data available, the Accident and Health Insurance industrial group ranked 96th , and the Health Care Plans group ranked 144th, out of 216 Industries on the Yahoo Business ranking of profitability.

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