Will Reducing Health Care Profits "Bend the Curve"?

I keep seeing comments on how outrageous it is that health care companies make profits, and how those profits are adding so much to the cost of American's health care. President Obama has said a public option is needed to "keep the insurance companies honest". "Right now, at the time when everybody's getting hammered, they're making record profits," he said in his July 22nd prime-time press conference. Can the high cost of health care in the U.S. be attributed to the profits of the insurance companies?

Based on all the rhetoric about how horrible these profits are, one might think reducing these profits would have a big impact on the overall cost of health care. So, for the sake of argument, let's assume that a public option, or some other reform, is enacted and is so effective that it eliminates all the profits of publicly traded health insurance companies. What would the impact be?

I pulled the net income (aka profit) for the last 8 quarters of all publicly traded companies that are part of the Russell 3000 Index, which includes nearly all stocks. Insurance companies are part of the Health Care Providers & Services industry, according to S&P. Although not all companies in this industry are insurers, I include them all anyway, which makes a list of 95 companies, which includes Aetna, Wellpoint, Cigna, and many others.

To level out changes over time, I averaged the last 8 quarters, then multiplied this by 4 to get an estimate for a year. Then I added them all up.

By this method, I estimate that all publicly-traded health insurance companies made $18.8 billion in profit, on average, over the last two years.

Big number, right?

However, consider that total health care expenditures for 2008 are estimated to be $2.394 trillion. (See table 1, page 3, here)

Therefore, if all profits of the health insurance industry were somehow eliminated, the U.S. would save 0.8% of its total health care costs. Not what I would call "bending the curve."

What if we include all health care companies - biotech, pharma, medical device companies, etc?

This results in a list of the largest 404 health care companies, which, using the methods above, make an estimated $73.5 billion of profit. Removing this profit from the system would save us 3.1% of our total health care costs. Again, not a major impact. Instead of health care costing us 15.3% of GDP, it would cost 14.8%.

Although blaming our health care problems on the profits of companies might make some people feel better, even getting rid of them entirely will barely dent the cost problem, and would almost certainly result in other problems.

Note: This analysis was inspired by similar work in Alex Lickerman's "A Prescription for the Health Care Crisis" (here). I strongly recommend you read his thoughtful analysis of why our health care is so costly. (Hint: it's not because of profits.)