Such a Deal

A few days ago brings one of the more egregious attempts at health care cost analysis I've seen in quite a while. It attempts to make the case that malpractice is the cause of high health care costs. I added some thoughts, which may or may appear by the time you read this.

So, what is the profitability of health insurance? I don't have the time or energy to research the top 10 or top 100, but I do have some association with United Health Care, so I'll look at their SEC approved numbers.

First off, profitability is gross profit divided by invested real capital.

Here's United's invested capital (Property, equipment and capitalized software): $2,515,000

Yes, just a bit over $2 million. I'll bet you didn't know that. Insurance, along with the rest of financial services, is a capital light industry. A few computers and some office cubes is about it. I'll bet you thought they had billions and billions of dollars tied up in the effort. Nope.

So, how much gross profit did United generate in 2011?

Here's the numbers:
Revenues: $101,862,000
Operating costs: $15,557,000

So, gross profit: $86,305,000

Well, not really, since we really should deduct those Medical Costs. United Health claims $8,464,000.

Under normal circumstances we would have gross profit (revenue minus direct costs) and net profit (revenue minus direct costs minus overheads). Okay, why not use net profit? For the simple reason that managements have complete control over siphoning gross profit into "costs" at their whim. In all other business, gross profit is the measure. The financial services industry generally, and insurance far more so, tries like hell to deflect attention from the true level of investment in the business and the true costs of running the business. In particular, that $74,332,000 in "Medical Costs" is just a pass through to providers. One might argue that Big Pharma sucks up too much in total health care costs, and that's reasonable. But Medical Costs aren't a cost of doing business for United Health; it's not equivalent to Ford buying raw steel to make Mustangs. United Health never really touches the money, much less ***adds any value to it*** as Ford does to raw steel to make that Mustang.

United Health made 4 times its invested capital!!! In one year. Not a bad deal. The rest of the difference is waste and corruption up the management pyramid.

In order to understand the impact of malpractice, it helps to understand demographics. It turns out, not surprisingly, that older doctors get sued with a substantially higher frequency (here)

To look at how claim frequency changed over the duration of a physician's career, we grouped physicians into three age categories: under age 40, between age 40 and age 54, and age 55 and older. Fifteen percent of the young physicians but 60.5 percent of physicians in the eldest age group reported claims.

So, in other words, as the boomers age, so do their doctors, who get senile and get sued. It's not rocket science. Experience is the best teacher, but Father Time sucks your brains out.