Much of the focus in the health care reform debate has been on the competition in the insurance industry - by introducing the public option, the hope is to be able to break the insurance cartel and force them to lower the premium. But insurance is only one link in the health care industry. The 800 pound gorilla in health care is the drug manufacturers. All publically traded health insurers have a total market cap of 88 billion dollars, compared to nearly a trillion dollars of the total market cap for the brand name drug makers. And they make much, much more money than the insurance companies.
Here I examine the big three's of each industry and compare their profitability. All data are collected from the Yahoo finance website.
The largest three health insurance companies are Unitedhealth, Wellpoint, and Aetner. They combine for 62 billion dollars market cap or 70% of the industry. Below I list their key financial statistics for the past 12 months:
Company | Revenue | EBITAD | EBITAD/revenue |
Unitedhealth | 84B | 7.25B | 8.6% |
Wellpoint | 61B | 4.17B | 6.8% |
Aetner | 33B | 2.62B | 7.9% |
Here I use EBITAD (earnings before income tax, amortization and depreciation) to avoid inconsistencies due to differences in tax rates and bookkeeping issues. The average profit margin for these three companies is a healthy 7.8%. This is quite good, but it is nothing compared to what the drug companies are making.
Here are the same statistics for the largest three drug companies which combine for a total market cap of 410 billion dollars.
Company | Revenue | EBITAD | EBITAD/revenue |
Johnson&Johnson | 61B | 19B | 31% |
Novartis AG | 42B | 11B | 26% |
Pfizer | 46B | 21B | 46% |
The average profit rate for these drug companies is a whopping 34%. In other words, a fully one third of the price you pay for a prescription goes into their pocket as profit,
after deducting all of their costs related to developing new drugs! No wonder the market prices these companies at more than six times the price of the insurance companies even when they have comparable revenues. The drug companies bring in four times more profit.
Of course this is the consequence of the patent protection whose purpose is to encourage the development of new drugs. Is the price we pay worth it? That should be debated.