Watch Out - Your Industry May Be Gutted Like A Trout Next

I have written before about the  demagoguing going on about "health insurance profits" and just how BS those charges are.  Here is Obama yet again:

"There have been reports just over the last couple of days of insurance companies making record profits, right now," Obama said during a prime-time news conference. "At a time when everybody's getting hammered, they're making record profits, and premiums are going up. What's the constraint on that? ... Well, part of the way is to make sure that there's some competition out there."

This follows Pelosi saying:

I'm very pleased that our Chair of our Democratic Congressional Campaign Committee and member of the leadership will be talking too about the immoral profits being made by the insurance industry and how those profits have increased in the Bush years. We all believe in the profit motive; we all want to reward success.  But having that success come at the expense of America's working families "” have that success come by withholding care, when a person becomes ill, is just not right and we're going to take this issue in a new direction.

And pundits saying even crazier stuff, including Kevin Drum (who is actually one of the saner members of the left) writing:

It means the health insurance industry is scared that we might actually do something in 2009 and they want to be seen as something other than completely obstructionist. That means only one thing: they've shown fear, and now it's time to bore in for the kill and gut them like trouts. Let's get to it.

Rick Perry links to several posts debunking this claim, and shows a profit margin consistent with what I have found in my research -- about 3.3% of revenues, which my posts (linked above) showed has fallen over the last several years.  This profitability level ranks 86th(!) on the list of American industries, behind such rapacious industries as auto parts wholesalers and confectioners (see table in his post).  Look out everyone, if this industry is too profitable for this administration, then just about every industry in the country is too profitable.  Heck, this margin is even worse than mine, and I operate in an industry universally described as having "thin margins."

What do you call a man who thinks a 3.3% profit margin is too high?  How about "Marxist."

Update: My guess is that there is some health insurer who due to a merger grew larger and therefore made a higher profit in absolute dollar terms, so my guess is that Obama is not flat out lying.  But he is freaking close, given that he credits such profits to fee increases and denying services rather than business growth.  Profitability should be judged on margins, not total dollars (even better, it really should be judged on return on equity or return on assets employed, but that is rocket science to the economic monkeys wielding bone tools we have in the media).


  1. Stan/Tx:

    Welcome to the world of the oil industry.
    My industry has been castigated for years for obscene profits.
    To certain politicians, any business making a profit is obscene.

    The United States is currently engaged in a war between freedom and socialism. The political left see this point in history as the time to take over the country. Health care is one battle that they have to win to get the wedge in the door. Any lie that progresses the fight is acceptable. It is not about providing for a few people without health care, it is about controlling the 90% with health care.

    The battle is not going well for freedom right now. The recession has been used to subjugate the banking system. The auto industry is under government control and the politicians showed that they could ignore existing laws with impunity. The politicians have created positions of power (called Czars), without public accountability, to control aspects of the government. There is an ongoing plan to control the public census to ensure that future elections maintain status quo. The news media is acting as the propaganda arm of the left in the fight.

  2. Mesa Econoguy:

    Couple o’ things:

    1) Kevin Drum is not “sane” by any measure. Pelosi’s a damn lunatic and a dangerous fraud. And a fascist.

    2) Will a Public Option Hurt Insurance Company Profits?

    3) What do you call a man who thinks a 3.3% profit margin is too high?
    Flaming progressive jackass communist?

    4) Who’s Rick Perry?

  3. MJ:

    Who's Rick Perry?

    It's Mark Perry, from the Carpe Diem blog.

  4. Mesa Econoguy:

    Alternative Answer to #3: Paul Krugman?

  5. MJ:

    Alternative answer to #4: current governor of Texas.

  6. Mesa Econoguy:

    Ah. He was awesome with Golden State….

  7. Craig:

    But he is freaking close, given that he credits such profits to fee increases and denying services...

    Not to mention doctors purposefully and unnecessarily removing kids' tonsils and diabetics' feet solely to bring in big fees.

  8. Mesa Econoguy:

    Funny you should mention that…..I have an odd feeling that someone will post something on “the economics of amputation” related to the current healthcare proposal (and Obama’s incredibly silly NH town hall speech) in the next 24 hrs…..

  9. Ian Random:

    That's what the lefties I've talked to have complained about. It's the absolute dollars that get them excited, but absolute dollars in the budget deficit don't. Dennis Prager recommends not looking at lefty arguments as logical, but pure emotion.

  10. alanstorm:

    Where did the "record profits" line come from, anyway - was this just another lie, or did some insurer hit 3.31%?

  11. MGW:

    I'm sure that my facts have no place in this debate, but if you look at Aetna (one of the largest insurers), they had operating profit of about $2bn and insured approximately 17.5mm people (this number may be higher since health insurance companies often provide secondary insurance to companies who self insure). If you assume that this profit could be spread evenly to everyone, that is only $100 per person in profit. While I'm sure people would like $100 each, this profit is likely made from investment income (not that I'd expect Obama to know how insurance companies make money).

  12. Reformed Republican:

    "Well, part of the way is to make sure that there’s some competition out there"

    There is competition. It comes from the other insurance companies. Want to increase competition? Decouple health insurance from employment so that individuals can choose their own companies and policies instead of being limited to a small list provided by the employer.

  13. Doug:

    Profitability as a percentage of equity or assets makes since when talking to investors about return on capital, but consumers are looking at costs. As few on the left seem to understand, profit is also a real cost of doing business and that function is probably best measured as a margin of revenue.

  14. morganovich:

    it's very possible to have "record earnings" while your profit margins erode.

    consider a lemonade stand. if you sell $100 worth and make $10 profit, that's a 10% margin.

    if you merge with another lemonade stand, that was having trouble and was selling $100 of lemonade at $5 profit, now, you are a $200 lemonade empire with $15 in profit.

    so, $15 is record profits, but as a % of revenue, it's 7.5%, down from the 10% you used to get. so it's difficult to argue that you are somehow greedier and making record profits by gouging customers. your returns have dropped.

    health insurance companies have been merging at a tremendous rate over the last couple of years. mostly, this is being driven by margins being so low that they are having trouble surviving on their own.

    to portray an industry that is being driven to consolidation to survive low and deteriorating margins as profit gouging is patently absurd.

    it seems to me that there are only two possible explanations for this curious tactic:

    1. the president and congressional leaders are utterly ignorant of economics/business and literally have no idea what they are talking about

    2. they are deliberately lying to gather support for their policies.

    neither scenario fills me with a great deal of confidence.

  15. boqueronman:

    Does anybody here think the "Three [Leftist] Amigos" mentioned above have any idea how a business operates? What a profit and loss statement is? What income statements and balance sheets are? The ownership and staffing profiles of insurance companies are? Ian has it exactly right. The obscene/immoral profits pejorative comes from a mixture of ad hominem attack politics and the Pavlovian emotional response they expect from your typical non-profit community organization employee to a dollar amount higher than his/her annual salary.

  16. Zach:

    Back in the 90's I made over 4% interest on CD's. Guess I should be reported to for immoral profiteering.

  17. tomw:

    The Senate and House are making RECORD BREAKING SALARIES! Shouldn't they be concerned when all of their constituents are having such economic problems? Shouldn't they roll back their raises that are granted automatically unless they vote to rescind them?
    At a time when we have record deficits, they legislators should refuse pay raises, or we should regulate them!
    Whattabunchacrap. Record oil profits --- IMPLY Record Oil Tax Revenue GREATER than those hated profits, but you don't hear about that.

  18. Fred from Canuckistan . . .:

    "The American College of Surgeons is deeply disturbed over the uninformed public comments President Obama continues to make about the high-quality care provided by surgeons in the United States. When the President makes statements that are incorrect or not based in fact, we think he does a disservice to the American people at a time when they want clear, understandable facts about health care reform. We want to set the record straight.

    -- Yesterday during a town hall meeting, President Obama got his facts
    completely wrong. He stated that a surgeon gets paid $50,000 for a leg
    amputation when, in fact, Medicare pays a surgeon between $740 and
    $1,140 for a leg amputation. This payment also includes the
    evaluation of the patient on the day of the operation plus patient
    follow-up care that is provided for 90 days after the operation.
    Private insurers pay some variation of the Medicare reimbursement for
    this service.

    -- Three weeks ago, the President suggested that a surgeon's decision to
    remove a child's tonsils is based on the desire to make a lot of
    money. That remark was ill-informed and dangerous, and we were
    dismayed by this characterization of the work surgeons do. Surgeons
    make decisions about recommending operations based on what's right for
    the patient."

  19. alanstorm:

    Morganovich, it's worse than you think: consider that your two scenarios are not mutually exclusive. This 3rd scenario is more likely than either of the first two alone.

  20. class factotum:

    "this profit is likely made from investment income"

    I thought it was property and casualty companies that made investment income. Health insurance companies don't get to hold onto the money as long because claims are fairly steady.

    Incidentally, I think Obama et al probably also do not understand the difference between underwriting gains (the difference between premiums and claims paid) and profit, which is what is left after administrative costs are taken out and the dividend/underwriting gain paid back to the client. No, health insurance companies don't get to keep all the extra if they vastly overestimate the premium required. For larger companies that aren't already admin services only, there is (or used to be, in the late 80s when I worked for Prudential Ins) a dividend that was paid to the client.

  21. Noumenon:

    Back in the 90’s I made over 4% interest on CD’s.

    This is why I honestly don't believe that reporting profits as 3.3% makes any sense. No one would go to the trouble of running a giant business or investing in it for 3.3%. 3.3% is what you get for doing no work whatsoever. Also, 3.3% is so small that it ought to be wiped out by random factors: lawsuits, cost overruns, windfalls. Nothing as messy as a big corporation should be expected to produce profits that reliable.

    Call me willfully ignorant, but I am not gonna believe that competition in every one of the vast oligopolies in every industry is so tight that profit margins are competed down under 10%. Someone is getting paid better than that, they're just not calling it "profits."