In Indiana, everyone makes big profits on health care

April 21, 2014
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It looks like everyone is making good money on health care in Indiana.

We already knew that was the case for hospitals in the Indianapolis area, whose reimbursements for both inpatient and outpatient care are at the top of the heap when compared with other cities. Hospitals in such cities as Anderson, Bloomington, Fort Wayne and Kokomo are doing just fine, as well.

Physicians don’t do too badly either, especially in recent years as hospitals have been sharing some of the wealth by employing physicians, which allows them to charge roughly twice as much for key procedures.

Nursing homes get a chunk of additional revenue, compared with peers in other states, and most of them are now getting extra federal money through partnerships with county-owned hospitals.

And, of course, drugmakers like Eli Lilly and Co. and medical-device makers like Zimmer Holdings Inc. enjoy the fattest profit margins in the industry—even though their products account for a small portion of overall health care spending.

With that extra money flowing to all those health care providers, you might think the state’s health insurers must be taking it on the chin.

But you would be wrong.

Indiana is the most profitable state for Indianapolis-based WellPoint Inc., which operates Blue Cross and Blue Shield health plans in 14 states. And WellPoint isn't even the most profitable health insurer in Indiana.

Those points were made clearly by a recent report from Citi Research, which shows WellPoint’s 2012 financial results from its commercial risk insurance in each of those states. Those figures include all the individuals and employers that purchased actual insurance from WellPoint’s Anthem subsidiary. But they do not include the money spent by self-funded employers, who hire large insurers like Indianapolis-based WellPoint or third-party administrators merely to administrate their health plans, not to take on the financial risk of them.
I looked at underwriting profits—that’s the percentage of premiums not spent on medical claims and administrative expenses, excluding any gain or loss from investments—for each of WellPoint’s 14 states.

The margin for Indiana in 2012 was 5.8 percent—38 percent higher than the average across WellPoint’s entire commercial risk business. The next-highest states were California at 5.3 percent and Kentucky at 4.9 percent.

In 2011, Indiana tied with California as WellPoint’s second-most-profitable state, with an underwriting margin of 5.5 percent, or 31 percent higher than average. Connecticut was highest that year, with an underwriting margin of 5.9 percent.

It should be noted that these underwriting profits are actually down from what they were before Obamacare, which started requiring health insurers to issue rebates to consumers if less than 80 percent of their premiums went toward medical claims.

In 2006, for example, when the economy was roaring and Obamacare wasn’t around, Anthem had an underwriting profit in Indiana of 10.3 percent, according to filings with the Indiana Department of Insurance.

It also should be noted that things are changing in health care. Hospitals aren’t making the kind of money they were even as recently as 2012. Insurers created narrow networks for their Obamacare exchange plans in what was a rare move to limit patients’ choices—at least here in Indiana.

So the situation in 2012 is not the situation now.

That said, something about the health care market here clearly allows all the players to make larger profits than most of their peers nationally.

Consider that UnitedHealthcare earned 2012 underwriting profit in Indiana of 7.3 percent, which ranked 10th out of 44 states in which Minnesota-based United insures at least 2 ,000 people.

For Humana Inc., Indiana ranked fifth out of 23 states in which the Louisville-based company insures at least 2,000 people. Its underwriting margin here in 2012 was 3.6 percent.

When it comes to selling health isnurance to small employers, the profits are particularly large. WellPoint's underwriting margin on small employer groups was 10 percent in Indiana in 2012—highest among all its states. UnitedHealthcare's margin on small employers was 10.2 percent—fifth highest among its 44 states with significant market presence.

So why do insurers make more money here?

It could be Indiana’s insurer-friendly regulators.

But I would chalk it up more to the games health care providers and insurers—especially Anthem—have played for years on prices, allowing them to rise aggressively so long as Anthem could tout that it had larger discounts than other insurers.

But the largest discount on something that rises 8 percent to 12 percent every year is not holding down the cost of care—not in the least.

Why didn’t Anthem more forcefully hold down providers on price? Some of it had to do with the distinct territories many hospital systems had, which lessened competition.

But more than that, employers have never wanted to tell their employees no on anything—especially on choice of physician. So HMOs never caught on here. Neither did the aggressive expense management that companies like United use much more broadly in other states.

Instead, everybody in the health care business made lots of money—and Indiana’s health care costs grew to be billions more than other states pay. That's been good for the health care industry, but not for the rest of the state.

  • What hypocrites
    If everyone in healthcare made lots of money why the layoffs at Community Health Network, St. Vincent, IU and Methodist hospitals? Why were they so panic stricken the last 4 years? I know that the layoffs are still happening at Community Hospital East. It just doesn't make any sense.
    • Physician Pay
      The word "everyone" isn't quite factual. You may want to look at physician pay and top executives. The healthcare structure is no different than the rest of the economy. Those on top are making vast amounts more than those at the bottom. It is a gap that is ever widening.
    • Why Layoffs?
      All of the hospital systems need to reduce head count so they can afford to pay for the enormous increases in physician compensation. JK's article on 'millionaire physicians' is just the tip of the iceberg!
    • Contrast
      Contrast that news with the fact that Indiana's population is one of the least healthy in the nation. At least profits are healthy, right?!
    • Basic Factors Are Unclear
      JK - Another excellent article. I am still mulling this over and trying to find the basic factors that allow Indiana providers higher margins and profits. Weak regulation by the state, limited information for consumers on prices and practices, and limited decision making by patients on treatments would all seem to be pieces of the puzzle but who really knows at this point. Thanks for continuing to shine a light on the health care industry.
    • Lack of conflict free process adds to lack of cost control
      Good stuff. Specifically concerning employer sponsored coverage. Typically employers avoid their fiduciary responsibility as it relates to executing a process to ensure "reasonable" plan costs. This avoidance of their fiduciary duty is a significant factor in these rising costs. Not only does being a good fiduciary (educated, conflict free, processed orientated consumer) make business sense (lowers cost), it is also required by ERISA. Obviously the process most plan sponsors (employers) rely on to control costs (i.e. renew with the same broker every year without a competitive market analysis) is working great. In a market that is riddled with conflicts of interest and funded by consumers that lack knowledge and process, prices will continue to rise. Keep up the good work JK.
    • Hmmmm
      Once again, no listing of UnitedHealthOne/Golden Rule Insurance, UnitedHealthcare's individual health insurance megacompany. Why not?
    • Great job JK
      Really insightful article. Please keep up the good work.
    • Admin Costs
      JL, Thanks for the nice article. You mentioned the separation of costs, medical/admin/margin- what was the medical only percentage? Thanks, TOS
    • Excellent and informative
      Nice article JK...
    • Big Profits???
      Wow, JK, it would be better to perhaps gather input from other resources about the "High Profits" you allege in your report. One good example is the Pharma industry, where the stock prices across most of the industry have been languishing at pretty astonishing low levels for many years now; good example is Lilly, which had a high around 117 in 1997 and has now climbed up to around 59 after bottoming out in 20's or 30's. Additionally this industry must invest 12-15 years and spend over $1Billion dollars to bring one product to market. Additionally, Pharma and the hospitals have been cutting back significant numbers of staff for some time now, so obviously, there is a business need for these reductions, or they either go out of business or are not able to maintain the staff that are required to provide us with the quality of health care we enjoy in this country. So, I hardly think it is representative to pick one point in time as you have seeemed to have done in your article, and infer that the profits are excessive. Obviously, you must have in mind a specific number that represents "fair profit", and certainly even 5 percent must seem excessive?? It might help in terms of fair balance to talk to representatives of these industries to ascertain their views of their businesses?
      • Your Conclusion
        JK, it appears the point you are trying to make is that healthcare providers and insurers in Indiana make profits that are inappropriate. That could very well be the case but you don't really justify that conclusion. Instead you make the statement in your final paragraph that "Indiana’s health care costs grew to be billions more than other states pay". You probably should have shown the support for that representation. If the costs that Indiana consumers pay are out of line based on a logical analysis, then your point is well taken. If providers and insurers make money in Indiana, but costs are competitive for consumers, then you are simply saying that profits in healthcare are bad.
        • To Dr Obama
          The one thing I regret about this post is its headline. The entire post is about comparing profits made in Indiana with other states or markets, but the headline makes it sound like I think large profits are inappropriate. I don't. My point is that revenue and profits tend to be higher in Indiana for all the various players--providers and payers--and not just one part of the system. To me, those higher revenues and higher profits are not bad in and of themselves. In fact, if profits were higher here but spending was lower, that would be a victory, in my opinion. If profits and spending were higher here, but overall health was better than the rest of the country, that too would be a victory. But Indiana seems to have a bad story on all fronts: higher spending than average, higher profits than most other markets and worse health. To me, that's a sign of dysfunction that deserves to be highlighted. As for the justification of these points in my blog, you'll need to click on the links. I have provided plenty of justification in other posts, such as the one HC spending being $5 billion more each year in Indiana than the national average.

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