> It is a competitive business without a lot of pricing power. But what it will do is provide consistent, reliable returns. And since more people are getting more healthcare, the magnitude of the profits will obviously be higher, hence the increase in stock price.
It seems like you’re theory-crafting here rather that describing what is actually happening in the industry.
1. I somewhat sloppily used the term “profits” in my previous post, and I should have used “gross margins”. Specifically, 80% of premium payments have to be used on healthcare expenses. Their profit (~5% as you mentioned) comes after they pay their relatively consistent operating expenses out of their gross margins.
2. The increased number of people getting insured is not what has driven up the insurance companies profits. Those numbers don’t add up.
3. The prices of name brand insurance have increased fairly consistently. It’s not competitive at all, imho. It’s an oligopoly.
4. If you know people who work in medical billing and/or you’ve known a handful of people with substantial medical bills, you will know that hospitals have increased prices for many things to ridiculous levels, and they “nickel and dime” patients at ridiculous markups for anything possible. Why? Insurance companies don’t bat an eye at these expenses any more, and they are not incentivized to do so. As money out increases via payments to providers, money in can increase via premiums, and thereby absolute gross margin can increase proportionally. If you need further proof, check out the actual prices that people pay when insurance doesn’t cover something. Miraculously, charges come down and substantial portions of the bill will be forgiven/waived.
5. Investors have warmed up to the idea that health insurance is a government-supported racket that ultimately screws people who have to pay their own premiums in part or in whole.
Note that I am a fan of most parts of the ACA, but the 80/20 rule (and the misaligned incentives that it facilitated) needs to be fixed. That said, the hospitals and insurance companies are feeding at the trough, they have established a new excessive normal, and they will fight any change to the 80/20 rule by comically pleading poverty.