Profit margins and your health insurance premiums

You have heard it all … outrageous profits for health insurance companies, price gouging and rising premiums. We all know that profits drive our premiums higher, right?

Not so much.

By comparison, Starbucks in 2017 had a net profit margin of 12.89%

Despite all the rhetoric, profits are not the driver of growing premiums. The growth in aggregate profits of a health insurance company is primarily the result of a growth in the number of people it insures, not a higher profit on each policy.

The significant driver of higher health insurance premiums is the cost of health care and how much health care we use.


  1. In 8 more years, none of this will matter since I will have to learn the details of the current Medicare system, but I am really trying to understand the current status of health insurance in America today.

    While reviewing my open enrollment data for 2019, I notice that my company’s offering of what they call NJ Horizon HMO (which is really NJ Horizon Advantage EPO) is $10,928 more per year then Horizon EPO for NY and CT. I’ll admit that I do not know if coverage is EXACTLY the same, but I got to believe it is close. The comparison chart has the same co-pays and general coverage between the two plans.

    Since my company is self-insured, profit or contract costs are fixed. So, why is there a 32% difference in premiums? We are basically in the same region, so regional costs should be small compared to southern or western states. Why is coverage so expensive in New Jersey? What is the missing factor? I doubt that they pay doctors in New York and Connecticut 32% less. National drug pricing should be the same. What regulation, malpractice laws, or the way New Jersey regulates medical delivery is driving up costs in New Jersey?

    I may not be able to lower the national healthcare costs but it is clear to me that New Jersey government is doing something wrong to drive up my costs and I would like to know what and why.


    1. Prices in the Metropolitan area are more expensive. However, there is a difference between an HMO and a EPO. THE EPO is a smaller, closed network and typically offers NO out of network benefits. Hence would be less expensive. However, the difference you state is quite high. It could be the employer manipulation the premiums to drive people out.


      1. I am shocked that my employer would manipulate the premiums. Not really and nor surprised.

        Last year I learned the hard way from Horizon that what was listed on my company’s rate chart as a “HMO” is an EPO and in fact my ID cards say “Advantage EPO”. This is the first year that I could see apples and apples on the rate chart with my new knowledge about Horizon HMO being an EPO for non-Medicare eligible employees and spouses. The only difference is where I live and what is available for me to use in that area.

        When comparing oranges to oranges (Medicare options because Aetna is not offered as non-Medicare or apples here) my company’s rate chart has three regional (but closed) Aetna HMO plans. The three regions in New Jersey are Metro, Suburban, and Southern. There is a spread of 22% between these Aetna plans and all three are on the upper end of the nine offered plans which is expected for being an HMO. Surprisingly, the Southern New Jersey plan has the highest rate which is totally opposite of what I expected since everything costs less compared to living just outside of New York City.

        Of the nine plans offered there is about a 44% spread in the rates but that is expected since the coverage and deductibles varies widely. Besides offering plans with different affordability, I assume that we have nine plans because active employees live in at least six states, may be more, and not all plans have doctors in area networks where the employee lives. But these two EPO plans are the only two that are close to being the same. It just seems like that New Jersey must be causing some extra expenses onto the New Jersey EPO plan that is not on the New York nor the Connecticut plans to cause an 32% difference between almost identical plans.

        It makes you wonder if Trenton is adding additional costs to healthcare in New Jersey and is there anything I can get my elected official to do something about it.


      2. Because there are different options the employer tries to balance out the experience among the plans. Otherwise one option will become unaffordable. It’s not that they are making money on you just they are likely looking at cost sharing on the total group basis.


    2. To know what is really going on, you need to start by asking for the COBRA rate (you said they were self insured) then the employee contribution rate for each option.

      Historically, Horizon in New Jersey pretty much includes every health care provider – regardless of what they charge, resulting in a much higher premium. A 30% difference seems high, but if the employer contributes the same amount regardless of the option you select, a 30% difference in employee contributions is not surprising at all.

      Perhaps Horizon NJ has changed since the last time I bought coverage for my employer and employees.


  2. Well, health insurance company profits are up, way up, way up up – just look at stock prices….

    Click to access The-Profitability-of-Health-Insurance-Companies.pdf

    But, it just shows to go that health insurance company profits are not the issue, they were relatively unchanged by all that “health reform” that was part of the Patient Protection and Affordable Care Act of 2010.

    The cost of coverage is primarily driven by health care utilization. This is so because prices for health services, as estimated by the CPI for Medical averaged about 4.75% per year over the past 35 years (1983 – 2018).

    Unless you want to be standing in line or denied care, your health care costs will continue to increase. But, importantly, you need to compare the cost versus the value received.

    Is the increased spend worth it to you? My favorite example is that my dad died at age 53 in 1969. My mom had a series of heart attacks with a major event in 1989. Had she had that same heart attack in 1969, she would have died that day. However, due to medicine and changes in her diet and some modest exercise, she lived another 12 years to age 76 and died in 2001 – albeit with medical issues every day of that 12 year period. That’s 12 years where her grandchildren and children got to know her and enjoy her company, to hear stories about coming over on the boat through Ellis Island as a 1 year old in 1925. It gave us all the opportunity to thank her as the matriarch of our family.

    So, when my dad collapsed and died in a single day, the medical spend was minimal.
    When my mom lived 12 years, she probably spent $100,000+ during that period.

    It is easy for me to confirm that the value she received and we received far outweighed the cost.

    And yes, her five children, and eight grandchildren all paid in substantial amounts in general revenue and FICA-Med taxes to support Medicare Part A, B and D – more than 20 times what she spent in those 12 years.


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