From a review of SEC filings, here are the 12 publicly-held Health Insurance Corps with Core Pretax Income (PTI) above $100 mil in 2010:
……………………………...............2010
……………………………................PTI……..Mix
……………………...........HQs..(mils of $s)
UnitedHealth……….....MN…..7,383…..34.5%
WellPoint…………........IN…….4,354…..20.4%
Aetna………………........CT….…2,644…..12.4%
Cigna……………….........PA……1,870…....8.7%
Humana…………….......KY……1,750…....8.2%
Coventry(1).......………MD……..965……..4.5%
Assurant(2)......……….NY……..912……..4.3%
Amerigroup…............VA……..437……..2.0%
Health Net………….......CA……..331……..1.5%
HealthSpring………......TN……..309……..1.4%
Caremark Ulysses(3)..NY……..274……..1.3%
Centene……………........MO……..154……..0.7%
Total of all 12…………………..21,283…100.0%
(1) Coventry 2010 PTI excludes Provider Class Action Charge of $278 mil.
(2) Assurant 2010 PTI excludes Goodwill Impairment Charge of $306 mil.
(3) Caremark Ulysses was previously named Universal American.
As you can see from the above chart, just a few health insurance companies dominate the industry, with the Big 3 (UnitedHealth, WellPoint and Aetna) generating 67% of the total industry’s earnings in 2010 of the 12 largest health insurance corps. And when you also add in the next Big 4 (Cigna, Humana, Coventry, and Assurant), these Big 7 generated 93% of the total of the 12 largest health insurance corps.
For all 12 combined, here are the Total Core Pretax Income, Total Revenues, and Pretax Margin Percentage (PTI divided by Revenues) for the 2000s, by year:
…………...........Core………………….....Pretax
…………............PTI…...Revenues…Margin %
………….............(mils of dollars)
2000…..........4,000…..106,879…….3.8%
2001……........3,914…...108,809…….3.6%
2002……........4,122…...111,058…….3.7%
2003……........8,118…...120,568…….6.7%
2004…..........11,791…..137,738…….8.6%
2005…..........15,471…..175,958…….8.8%
2006…..........19,489…..227,818…….8.6%
2007…..........21,163…..250,994…….8.4%
2008…..........13,973…..272,115…….5.1%
2009…..........16,834…..287,751…….5.9%
2010…..........21,383…..295,107…….7.2%
Total for all
...11 Years…140,258…2,093,795…...6.7%
The above chart points to one of the key reasons that businesses and individuals have both been just devastated by very burdensome health care costs….they are both financing the profligate profits of the Big Health Insurance Corps.
As you can see from the above chart, the profits of the Health Insurance Corps were very reasonable at the end of the Clinton Administration in 2000, and also in the first two years of the Bush II Administration, in 2001 and in 2002.
But starting in 2003, these profits just started going to the moon, and continued their rapid ascent until the Great Recession hit in 2008.
For the 7 years from 2000 to 2007, the total profits of the publicly-held Health Insurance Industry increased by an incredible 421%, going from $4.0 bil in 2000 to $21.2 bil in 2007. This was more than 3 times these companies’ comparable period Total Revenue growth of 137%.
More saliently, this 421% pretax earnings growth of the Health Insurance Industry was 5.6 times the 75% growth of the 30 pristine Dow Industrials total pretax profits over the same 7 year period.
What about the core pretax earnings of individual companies from 2000 to 2007?
Let me leave out Cigna, because it also had a huge employee retirement and investment services business, as well as a life insurance business, and a re-insurance runoff business, all back then in the earlier part of the 2000s decade.
Well, all of the remaining Big 6 had just monster increases in earnings for that 7 year period from 2000 to 2007. Here are the percentage increases:
…..WellPoint…...+1,493%
…..Humana……..+1,031%
…..Aetna(1)……....+932%
…..Coventry……...+875%
…..UnitedHealth..+532%
…..Assurant……....+421%
(1) Aetna’s 2000 starting point Core PTI excludes Goodwill Write-off Charge of $310 mil.
Whoa, no wonder businesses and individuals have kept complaining about their sky high health insurance costs...so much of it was a massive transfer of wealth to the Big Health Insurance Corp as windfall profits.
And no wonder entrepreneurs pass on starting new businesses, or in expanding their existing businesses, given these incredibly high health care insurance costs. With both the rapidly and continually rising health care costs and energy costs, the risk/reward for starting or expanding a business has clearly turned from reward trumping risk a decade ago to way too much risk presently.
These windfall profits in the Big Health Insurance Industry during the heart of the Bush II Administration were consistent with the windfall profits in the Big Oil and Big US Defense Contractor industries during the same period. There just was so little US Government oversight of the profligate profits in these 3 industries. And the US Government financial coffers, all other US businesses, and US citizens are all now paying the severe price for this lack of US Government oversight.
So what’s happened after the peak earnings of this health care industry in 2007?
Well, first there was a substantial drop in the windfall profits in the start of the Great Recession in 2008.
Thereafter, despite much success in reining in some of the nosebleed premium increases of Big Health Insurance companies by diligent, very competent Health and Human Services Secretary Kathleen Sebelius, this powerful health insurance industry, which controls much of the US Congress and State legislatures, has still been able to successfully recharge its high profits, with its 2009 total profits up 20%, and with 2010 total profits up another 27%.
Thus, 2010 total profits for the Health Insurance industry even surpassed its previous peak industry profits of 2007.
Let me now focus on the Big 7 Health Insurance Corps from the time the Health Insurance industry hit its previous earnings peak in 2007. The total industry profits are up from 2007 to 2010, but only 3 of the Big 7 had Core Pretax Income increases from 2007 to 2010.
But what happened with EPS over the same period? EPS and EPS growth are what drive stock prices.
Well, all 7 of the Big 7 had nice EPS increases from 2007 to 2010.
How can that be? Well, it’s mainly due to the huge stock buyback programs in nearly all of these companies, including in all of the Big 3 (UnitedHealth, WellPoint, and Aetna).
Now let be even more specific in laying out what has happened to earnings in the Big Health Insurance Industry since there has been a change in Administration, beginning in 2009.
Here are the Core Pretax Income increases for each of the Big 7 Health Insurance Corps for the 2 years from 2008 to 2010:
…………….......Core Pretax Income….%
…………………....2010… ..2008…Increase
………………..........(mils of $s)
UnitedHealth..7,383.....4,624……60%
WellPoint….....4,354……3,122……39%
Aetna…………..2,644……2,174……22%
Cigna(1).………1,870……1,072……74%
Humana……….1,750………993……76%
Coventry………...965………572......69%
Assurant…….…..912…….…563…...62%
Total all 7.….19,878.....13,120……52%
(1) Cigna above 2008 Core PTI excludes Fair Value Guaranteed Minimum Business Adjustment Loss of $690 mil.
No, I’m not kidding, after these Big 7 Health Insurance Corps had a 437% increase in Total Core Pretax Income for the 7 years from 2000 to 2007, they piled on by generating a 52% Total Core Pretax Income increase for the most recent 2 years...2009 and 2010.
But that’s not even the total profit story here.
In comparison to this 52% Total Core Pretax Income increase, the after-tax Total Core Net Income of this industry for the most recent 2 years was a slightly higher 53%....that’s not much of a difference.
But just check out these differences between the after-tax Core Net Income and EPS percentage increases for the most recent 2 years:
..........................% Increase for 2 Years….....% Lower Average
.............................from 2008 to 2010………...Common Shares
………………......Core NI……EPS….Difference….Outstanding
UnitedHealth……56%.......71%.......+15%................9%
WellPoint(1)…….44%........81%.......+37%..............20%
Aetna……………...28%.......48%.......+20%...............13%
Assurant………….72%.......83%.......+11%.................6%
(1) WellPoint 2008 Core Net Income excludes a $481 mil tax benefit from a favorable audit settlement.
And this isn’t just a very recent 2 year financial engineering massive stock buyback strategy. It’s been going on for 4 or 5 years.
Below here is the Growth in Core Net Income, Growth in EPS, the Difference between the 2, and the % of Lower Average Common Shares Outstanding for the most recent 4 or 5 years for some of these Big Health Care Insurance Corps. This period includes in its center, the Great Recession.
…….…...............% Increase (Decrease)………...% Lower Average
…….............For 4 Years from 2006 to 2010...Common Shares
………………....Core NI……EPS……Difference….Outstanding
UnitedHealth….11%........38%.......+27%................19%
WellPoint………(7)%........44%.......+51%................35%
Coventry………..9%.........20%.......+11%..................9%
…………............% Increase (Decrease)……………% Lower Average
……............For 5 Years from 2005 to 2010……Common Shares
………………....Core NI……EPS……Difference……Outstanding
Aetna……………12%........61%.......+49%..................30%
Cigna……………..6%........49%.......+43%..................29%
Assurant……….32%........62%......+30%..................19%
The key point here is that in determining fair insurance premium prices for Big Health Insurance Corps to charge, they should be viewed in light of the percentage increase in EPS the health care insurance company is generating, not in light of the percentage increase in reported Pretax Income or increase in reported after-tax Net Income which the health care insurance company is generating. CEOs work for their stockholders, and thus EPS, and EPS growth, which drive stock prices, are the relevant measures of performance. CEOs also are huge stockholders of the company. Further, all corporate executives, and many other company employees, hold many stock options, and thus stock price, and EPS and EPS growth, are critically important to them, as well.
I think it would be very beneficial if the US Senate Committee, that handles Health Care, would now call in the CEOs of the Big 3 Health Insurance Corps for a public committee hearing, similar to what was done very effectively with the Big 5 Oil Corps, when tax subsidies were being studied, which proved to be very informative to the public.
I further think that this US Senate Committee should specifically request a very simple schedule from each of these CEOs, which shows for each year from 2003 to 2010, the actual annual percentage premium rate overall increase, and the percentage change from the previous year in the company’s Reported Pretax Income and also in its Core Pretax Income, in its Reported After-tax Net Income and also in its Core After-tax Net Income, and much more importantly, in its Reported Diluted EPS and also in its Core Diluted EPS.
And then each Big 3 Big Health Insurance CEO should explain publicly in this Senate Hearing how he/she justified each year’s overall premium rate increases, given the company’s profit situation in that year and in the immediately preceding year.
OK, so certainly these Big Health Insurance Corps have finally seen the light, and have priced out their new insurance premiums in light of their EPS growth in the first quarter of 2011. Actually, just the opposite….they have continued their unreasonably high premium pricing, and over a very inflated prior year base.
In the first quarter of 2011, the 7 Big Health Insurance Corps generated Total Pretax Earnings growth of 12%, which precisely matched their Total after-tax Net Income growth of 12%. But in their clearly more relevant EPS growth, these 7 Big Health Insurance Corps generated Total weighted EPS growth in the first quarter of 2011 of a much higher 22%, which is a massive 10% higher than their 12% earnings growth.
When inflation is exceedingly low, and these companies are generating 22% earnings growth over an already windfall profit first quarter 2010 earnings base, there is no way these Big Health Insurance Corps should be allowed to generate earnings like these, when health care costs are putting such severe financial pressure on US citizens, on US businesses, and on the US government, with its massive debt.
Here is a breakdown by each individual Big 7 Health Insurance Corps of Net Income growth vs. EPS growth in the first quarter of 2011.
% Increase (Decrease) for
First quarter 2011 over 2010:
………………......Core NI……EPS……Difference
UnitedHealth……13%........18%.........+5%
WellPoint…………..6%........24%.......+18%
Aetna…………….....4%........17%.......+13%
Cigna…………….....51%.......54%.........+3%
Humana…………...22%.......22%...........0%
Coventry…………..13%.......12%..........(1)%
Assurant………...(10)%........4%........+14%
Total of all 7……..12%.......22%........+10%
That 10% Difference spread is due to the substantial stock buybacks of many of these Big Health Insurance Corps. A substantial portion of the cash inflow from their windfall profits earned by most of these Big Health Insurance Corps are being transferred to their stockholders in stock buybacks, which has the add-on benefit of substantially growing their EPS, which further drives their stock prices higher…..Incredible creative financial engineering, but it’s a pyrrhic victory to the Big Health Insurance Corps, because it’s earned at the clear detriment to, and thus on the backs of, US citizens, US businesses, and the US Government.
In reviewing all of the above numbers, I have to conclude that there is no way these Health Care Insurance Corps could have possibly been able to justify their insurance premium increases in any year since 2003, given the outsized increases in their profits, and in their incredible EPS growth.
Frankly, I think US citizens and US businesses paying these clearly unreasonable insurance premiums should be demanding an insurance premium rollback in the prices they were charged.
Pundits keep talking about what the US debt, and what Medicare will look like in ten years and in twenty years. Well, check the following out.
In 2010, these 12 Big Health Insurance Corps generated pretax profits of $21.4 bil. If you grow that at 12% per year, which is what their earnings grew by in the first quarter of 2011, these 12 Big Health Insurance Corps will generate $66.4 bil of pretax profits in ten years, in just the year 2020, and will generate $206.3 bil of pretax profits in twenty years, in just the year 2030. And when you add all of the next twenty years from 2011 to 2030, the total profits of these 12 Big Health Insurance Corps would come to an incredible $1.726 trillion.
I think the best way to reduce this $1.726 trillion of projected health care costs over the next twenty years is to switch to a single-payer system, which if designed properly, should remove all $1.726 trillion of these unnecessary Health Insurance Corp profits.
I think the next best thing to do is to at least remove the excessive, windfall profits of Big Health Insurance Corps. For several reasons, my hunch is that any reasonable computation would conclude that at least $1.0 trillion of this $1.726 trillion of projected Big Health Insurance total profits are excessive, windfall profits.
First, if the US and State governments designed wise, effective initiatives which would cut that 12% annual earnings growth of these 12 Big Health Insurance Corps in half from 12% to 6%, the total profits of these health care insurance companies over the next 20 years would come to $834 bil, $892 bil less than what they would come to by using a 12% annual growth rate. And in all fairness, even when you bring down the annual earnings growth rate of these 12 Big Health Insurance Corps to 6%, that still equates to annual EPS growth of 16%, with the 10% add-on growth rate due to the substantial stock buybacks. Nearly all stockholders would be extremely happy investing in a company which generates annual EPS growth of 16%.
Second, with the new health care legislation, there will be a substantial growth in the insured starting in 2014, if I remember the date correctly. This will substantially boost that annual earnings growth rate in 2014 and 2015, and thus also boost the difference over the 20 year period.
Third, there is already substantial unreasonable windfall inflation in the 2010 health insurance company earnings starting point. In all fairness, a good chunk of this inflation should be removed, by staggering in this removal over time, through wise, effective initiatives of the US and State Governments.
And fourth, there are many more insurance corps than these 12 publicly-held Big Health Insurance Corps, which will elevate all of the numbers, and thus also the differences. There are not just many more smaller publicly-held corps in this industry, but there are also many private health insurance corps of all sizes, and even some "non-profit" ones which generate very nice profits.
And lastly, to bring down the US debt level, I think that just like other industries should do, the Health Insurance industry should be ponying in here in the tax area. I would consider closing the tax loopholes the Health Insurance industry presently gets in the timing of when they include their insurance premiums in taxable income, and in the timing of when they are able to deduct insurance claims that are not yet settled. These two are optimal tax changes to the Health Insurance industry because accounting-wise, there is no hit to reported earnings, since these two are both viewed as temporary tax differences under GAAP….the Health Insurance Corp pays the same amount of tax either way, it’s just the year the tax is paid that changes. But yet the CBO properly scores this tax change as a substantial tax inflow to the US government, which keeps growing in amount each year, to infinity.
Next to study…..hospitals, another very fertile area to reduce health care costs.
