Posts Tagged ‘jail’

Your healthcare dollar

Wednesday, May 23rd, 2007

Where does all the money go in U.S. healthcare? Since 1985, costs have increased at double-digit percentages annually, yet doctors today earn only about one fourth what they did then, per hour, inflation-adjusted.

So where does the money go? Public company net profits tell an interesting story.

Big health insurance companies, often a bogeyman in these discussions, are actually not hugely profitable, earning a respectable but unexciting 10% on sales.

By contrast, nearly all major drug companies earn more than 25% on sales — almost unheard of among companies with over $10 billion in sales. 25% net margins are more appropos to small niche operations, such as a mugging or petty theft.

So are drug companies the perps? Well, not lately. Their profits have been falling dramatically for the past five years, and sales are pretty flat. Over the same period, health insurers have grown enormously, though they remain relatively unprofitable.

(As an aside, health insurers are probably worth a look for investors, because their rapid growth doesn’t seem to be priced into their stock in all cases.)

The implication is that until about 2001, drug companies were shaking people upside down to make the coins fall out. Then they stopped. (OK, what really happened is that they had high profit margins due to patent exclusivity, but then those patents began expiring.) Around the same time, insurers started taking more of the pie. But they didn’t keep much of it as profit, instead paying most of it through to employees and suppliers.

What suppliers, though? Not drug companies. Not doctors. So we must ask again: where it it all going?