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The Two Percent Solution

By Kim Bellard, June 13, 2011

Blue Shield of California recently announced that they would be limiting profits to two percent of revenue.  The move is believed to be one of the first of its kind, and is one of a series of bold positions on health reform that the company and its CEO, Bruce Bodaken, has taken over the years.  The company is even applying the limit retroactively, refunding last year’s profits over that level, some $180 million.

To be fair, Blue Shield of California has had its share of critics over the years, including criticism of recent rate increases or proposed increases and over compensation for its key executives.  The recent announcement has similarly drawn its share of skeptics, some of whom noted that California is currently considering giving the Department of Insurance the ability to reject “excessive” rate increases.  They speculate Blue Shield is trying to head off the increased oversight. 

I won’t presume to speculate on Blue Shield’s motives, and I’ve been in business long enough to know that companies have many accounting options to classify a good deal of money in ways that can help keep it from showing up as profit.  Still, I wish Mr. Bodaken had gone further.  Perhaps he should have called for a “2 percent solution” across the board for health care, or at least for its non-profit constituents. 

People love to pick on health insurers, perhaps because their premiums are one of the more visible costs to consumers in our health care system.  Health insurers often don’t make it easy to defend them, but their level of profits is probably one of the harder aspects to attack.  One economist points out that the health insurance industry ranks only 86th in profitability, with an average profit of 3.3%.  Profits from drug manufacturers, health information services, home health care companies all dwarf those of health insurers.  Granted, that data is a couple years old, but 3-5% is a typical profit margin for health insurers. 

Contrast this with a more beloved sector of the health care system, non-profit hospitals.  Moody’s estimates that non-profit hospitals made, on average, 2.3% in 2009.  Larger hospitals fared better; the 50 largest hospitals made 3.5% on average.  The IRS took a look at non-profit hospitals a couple years ago, and found an even bigger number.  In their review, non-profit hospitals’ “excess revenues” (total revenues less expenses) averaged 5%.  Rumor has it that some large health systems in my region of the country enjoy 10% margins, and it wouldn’t surprise me if that was less rare than many people would think.  So neither Blue Shield’s 2% limit, nor even their 2010 margin of 3.1%, look out of line.

One wonders if non-profit hospitals will be bold enough to follow Blue Shield’s lead and vow to limit their margins to 2%.  One also wonders if it would make any difference.

More troubling is the kind of practice the Wall Street Journal reported on recently, regarding physician-owned distributorships, or PODs.  Essentially, PODs are a way to give physicians a cut of the revenue from medical devices that they prescribe to, or implant in, their patients.   Not surprisingly, they found, for example, surgeons tended to perform more spinal implants when they were part of such arrangements, and not always for the better health of their patients. 

The Journal has been running a periodic series on various questionable provider billing practices, using Medicare Part B claims data (which, by the way, it had to go to court in order to get access to).  Their article on the potential adverse impact of PODs has now spurred a Senate Finance Committee report and a request for the HHS Inspector General to take a closer look.  Every time I read one of these articles, I’m struck with two equally strong reactions: how much of this kind of chicanery is there, and why the hell isn’t CMS doing more to identify and combat it? 

Physician ownership of other health care entities, which now include ambulatory surgical or imaging centers, pharmacies, and even hospitals (although health reform has put a halt to the latter, at least for now), have been linked to higher utilization (e.g., see Hollingsworth).  Defenders of the practice deny such links, arguing that they actually lead to higher quality or even to lower costs, but, honestly, it must be hard to say that with a straight face. 

Ironically, it seems like the one area where physicians seem to have less desire to own are physician practices themselves, which have seen a sea change in ownership by hospitals.  Less than half of physician practices remain independent.

Maybe ACOs and/or bundled payments will solve this problem, which I would refer to as self-referral had Rep. Stark not already claimed that term (although his efforts obviously have not met with persistent success), but I’m not optimistic.  It just seems like the people figuring out how to make more money from the health care system are smarter than the people writing and enforcing the rules that try to restrict them.  Or they have better lobbyists.

To be fair, I don’t really care all that much about who owns what or even how much their profit margins are.  What I care about with health care is if I receive the right care at a reasonable price…it’s just that both of those remain fairly nebulous concepts.  In health care, more than in any other sector of the economy, I want to have confidence that the people and organizations providing services to me care more about my well-being than they do their own financial well-being.  Those don’t have to be incompatible, but how do I know when they are?

Which leads me back to Mr. Bodaken’s bold effort.  The point is that profit margins may not be the best way to evaluate health plans.  Nor are medical loss ratios.  The proof of the pudding is in the eating, and the proof of health insurance is how expensive it is, relative to the benefits.  From a societal standpoint, we want to ensure that insurers don’t get to lower premiums by unfairly denying claims, providing poor service, or cherry-picking the healthier members.  If a health insurer really achieves lower premiums because they have better deals with providers or manage the health of their members better, why should we care what their profit margin is? 

Profits are not, in themselves, a bad thing, and I don’t understand why some people seem to think they are especially bad in health care.  It’s about demonstrating value.  After all, Apple makes close to 25% on its products, and people seem to love them.  Too bad they are not in health care (yet).  In health care, you’d need to be Sherlock Holmes to figure out what value is and how to know when you are getting it.  The 2% solution won’t do it.

Reader Comments (1)


I enjoyed your post - informative and witty. I, like you, don't mind profit if I'm getting value. And value can only be determined in advance if we know something about cost and quality. What I object to in health care is the lack of readily available, meaningful outcome data. I know it's a tricky subject, but would we even buy a pair of shoes with this little information? I had to leverage my network recently to get the scoop on a local surgeon - what does someone do who doesn't have a network of insiders to ask?

Thanks for the post!

June 13, 2011 | Unregistered CommenterMichelle Reese

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