New Review Finds California Commercial Health Plans' Profit Margins Rank among the Lowest in the Health Care Sector

SACRAMENTO, Calif., Feb. 14, 2013 /PRNewswire/ -- A new review of public data finds the average net profit margin for California's commercial managed care health plans was 3.6 percent in 2011, far less than the national averages for a host of medical-related industries, Patrick Johnston, president and CEO of the California Association of Health Plans (CAHP), announced today.

Other sectors of health care benefitted from net profit margins of up to 16.7 percent, according to Yahoo Finance data. In comparison, a new review of data filed with the state by California's commercial managed care health plans found they spent 89 cents out of every $1 in revenue on medical care for their members in 2011, the latest year for which figures are available.

"Some people and organizations have misled the public about insurers' profits, so we compiled accurate information that shows the lion's share of premiums goes to medical care — rather than profits," said Johnston. "The truth is California's health plans have a very small average net profit margin, especially when compared to profits of up to 16.7 percent for others in the health care industry."

The Affordable Care Act and state legislation also place tight limits on profits by requiring health plans to spend 85 cents out of every premium dollar on health care. This is called the "medical loss ratio." If health plans don't meet these requirements, they must provide rebates to policyholders.

To determine net profit margins, CAHP reviewed the latest and most comprehensive public filings at the California Department of Managed Health Care for the state's commercial managed care health plans. It found these plans, on average, surpassed the medical loss ratio requirements by spending 89 percent of revenues on medical care in 2011 and that they had a 3.6 percent average net profit margin.

"Even if we put together all the net profits earned by the nation's 10 largest health plans over the course of an entire year, we would only be able to cover the costs of three days of national medical expenditures," said Johnston. "Health care costs will continue to climb as we move forward with the Affordable Care Act. Health plans remain steadfast in their commitment to effectively expand coverage and implement the Affordable Care Act. But we recognize that new insurance taxes, more benefit requirements, limits on geography-based pricing and age rating restrictions will ultimately add to the cost of health care coverage."

In comparison to health plans, Yahoo Finance's accounting of net profit margins (accessed on Jan. 18) reported much larger margins for other health care sectors, including a 16.7 percent net profit margin for major drug manufacturers; 14.1 percent for other drug manufacturers; 13.7 percent for medical appliances and equipment; 13.6 percent for medical instruments and supplies, and 11.9 percent for biotechnology.

Yahoo Finance reported that other sectors, including generic drugs and home health care, had net profit margins ranging from 9.4 percent to 5.7 percent. Nationally, health plans' average net profit margin was just 4.5 percent, according to Yahoo Finance.

The only health care sectors with lower profit margins than California's commercial managed care health plans were drug delivery, diagnostic substances, long-term care facilities and medical laboratories and research.

"The net profit margin is the most accurate way to measure health plans' profits, especially when state and federal law require them to spend 85 percent of their premiums on medical care," said Johnston. "Some health plan critics have tried to confuse the public by citing health plans' return on equity figures, rather than measuring net profit. The two numbers cannot be used interchangeably."

The net profit margin measures the percentage of each premium dollar that is left after paying for medical care and other expenses. Return on equity measures how efficiently a company uses shareholder funds and may include other businesses and activities unrelated to the coverage offered by a health plan.

CAHP reviewed data on all commercial plans in California, including nonprofit plans, which refer to revenue in excess of their expenses as net income or surplus.

CAHP is a statewide trade association representing 39 full-service health plans. Through legislative advocacy, education and collaboration with other member organizations, CAHP works to sustain a strong environment in which our member plans can provide access to products that offer choice and flexibility to the more than 24 million members they serve. For more information, please visit www.calhealthplans.org or call (916) 552-2910.

SOURCE California Association of Health Plans