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Health Insurers Pump Your Premiums Into a Financial Black Hole
Ever wonder what happens to the premiums you pay for your health insurance?
You might be surprised to learn that more and more of the dollars you pay for coverage are being sucked into a kind of black hole. 
It doesn't really disappear, of course. It just doesn't do you a bit of good -- unless, of course, you believe it is to your advantage that it ultimately winds up in the bank accounts of a few investors and insurance company executives, including those who have to power to deny coverage for potentially life-saving care.
If you've been paying attention to what health insurance company CEOs have been saying to Wall Street over the past several months, you will know that they are spending more and more of their firms' cash -- which comes from you, of course -- to "repurchase" their firms' stock. And Wall Street absolutely loves that.
I once handled financial communications for CIGNA. So I knew that whenever the company could tell its shareholders that the amount of money it earned on a per share basis during the preceding three months was more than expected, those shareholders and other investors would likely show their appreciation by offering to buy even more shares of the company's stock. When more investors are buying stock in your company than are selling it, the stock price will go up. And when that happens, everybody who owns stock or can cash in a bunch of stock options -- including you, if you are a senior manager or a health plan medical director -- will suddenly be richer.
Being very familiar with how and why this happens, your company's top executives will do whatever they can make sure the earnings per share (EPS) exceeds Wall Street's expectations. One of the ways they do this is by joining the investors in buying shares of the company's stock.
They are actually repurchasing or buying back those shares because it was the company that initially put the shares on the market in the first place.
When CIGNA announced on May 5 that its adjusted income from operations for the first quarter of 2011 was $1.37 per share compared to $1.01 per share during the same quarter in 2010, the company's stock price hit a 52-week high. The EPS was way more than investors had expected.
You had to read all the way to the bottom of page two of CIGNA's earnings release, however, to learn that one of the ways the company was able to achieve such an impressive increase in the EPS was by buying back a whole lot of the company's shares.
CIGNA's net income for the first quarter of this year was $429 million. So what did the company do with its wealth? Well, between January 1 and May 4, the company repurchased approximately 4.9 million shares of its own stock for $210 million.
Abracadabra, Poof! Instant Profit Boost, and Richer ExecutivesThe magic works like this: when you buy back shares of your own stock, those shares are "retired," meaning that there are fewer shares outstanding. Reducing the number of shares available for purchase changes the mathematical equation used to determine the EPS. The reduction gives the EPS a boost. The more shares you buy back, the bigger the boost. 51 million Americans are uninsured and another 25 million are underinsured, largely because of the actions insurance company executives take to enhance their firms' bottom lines, and to line their own pockets.
All of the big for-profit insurers have been on a buyback binge lately. Humana executives announced a few weeks ago that it would be buying back $1 billion of its own shares between now and June 2013. That's a lot of money, of course, but nothing compared to what UnitedHealth said it plans to do. UnitedHealth's executives said the company plans to repurchase up to 110 million shares in the coming months. If UnitedHealth were to buy all those shares today, while the stock price is trading at around $50 per share, it would be spending $5.5 billion (of money that came from you, if you are a UnitedHealth policyholder) to make all those shares of stock go poof.
Stock options increase in value as long as the price per share goes up. Inflating the EPS by reducing the number of shares outstanding is almost always a sure-fire way to make sure executives have stock options with considerable value.
U.S. executives are as rich as they are primarily because of stock grants and stock options they are awarded by their companies. They love buybacks because, even though the cash deployed that way cannot be used for purposes that might be of greater value to the company as a whole and its customers, buybacks can increase their net worth dramatically.
In 2007, American companies spent 12 percent more on repurchases than they spent to improve their businesses, according to Fortuna Advisors, a financial consulting firm. The buybacks slowed after that year as a result of the economic downturn but are back in favor. According to data from Standard & Poors, U.S. companies bought about $86 billion of their own stock in the fourth quarter of last year, compared to $47.8 billion in the same quarter in 2009.
Buybacks Don't Help Customers, Just Increase Profits
The advocacy group Health Care for America Now (HCAN) discovered while compiling data of health insurers' earnings that between 2003 and 2010, the five largest for-profit insurance firms spent $64.1 billion on share buybacks.
As HCAN president Ethan Rome testified earlier this month before the House Energy and Commerce Subcommittee on Health: "Buybacks don't improve operations, make the health system run more efficiently or reduce premiums. Their sole purpose is to boost stock prices" for the benefit of investors and executives.
Meanwhile, 51 million Americans are uninsured and another 25 million are underinsured, largely because of the actions insurance company executives take to enhance their firms' bottom lines, and to line their own pockets.
26 Comments so far
Show AllObama's reform is a sick joke which the author unfortunately supported. The United States would have been much better if their health care regime was allowed to die as would have been inevitable if left alone. Only then could a real health care reform perhaps have been be proposed but the corrupt nature of American politics dictates a phony reform and that is what happened and even that may be too much for the insurance monopolies.
So why are so many of us buying premiums under this sick plan? Why are we enabling the scheme to succeed?
'cause there's no single-year, no national health plan...and we do get sick, from time to time....
In other words, buybacks are a kind of a shell game. Nice.
Don't worry. The Health Insurance companies are now too big to fail. That means nothing can go wrong.
Thank you, Obama voters.
Finally some details on Obamacare.
Please explain how the discussed corporate stock manipulations relate to the details of the health care reform bill...
Two points.
Company buybacks are a stealth mechanism to increase the compensation of executives who are "granted" (given) stock options. They are steathy because executive do not report (annually on 10-K) the millions of dollars from selling their stock options, they only report the amount of options granted. And the executives are the ones who decide whether the company buys back their shares, a direct conflict of interest.
Health care insurance companies do NOT provide health care. They are financial management companies that manage financial risk. That is why Senate committee meetings on health care insurance proposals were held by Max Baucus, the chair, of the Senate FINANCE Committee and did NOT involve the Department of Health and Human Services. Cigna, United Health, Humana, Wellpoint and Aetna do NOT provide health care, they provide a financial product and they do this to maximize their profits and compensation for executives.
And those "taxable shareholders" are predominantly rich bsatards who have a million ways of avoiding paying taxes.
Healthcare and Wall Street should be 100% separate. Treating the health of our people as a commodity is morally disgusting and also disfunctional.
Yeah, a typo. So what of it dickhead?
What the hell is the matter with this country, the USA is rabidly anti-universal health care and rabidly anti-union? Anyone who brings up universal health care and unions is labeled a commie socialist Marxist Maoist anti-American terrorist. Oh yeah, the problem with the US is that we are a corporate controlled plutocratic oligarchy. The sad part is that so many ordinary working class Americans mouth and parrot the right wing libertarian talking points. It seems that the only debate we have in this country is between the far radical right and right leaning centrists. Actual liberals and progressives are not even part of the dialogue, they are uninvited or ejected from the discussion.
"when you buy back shares of your own stock, those shares are "retired," meaning that there are fewer shares outstanding. Reducing the number of shares available for purchase changes the mathematical equation used to determine the EPS. The reduction gives the EPS a boost. The more shares you buy back, the bigger the boost."
so they use the premiums the collect from the consumer, and instead of using them to lets say, pay for healthcare
they instead use them to "buy back" and then "retire" the bought back stocks
meaning they no longer exist, meaning that there are less stocks, making all the remaining stocks worth more
and since they are using premiums collected from customers it doesn't cost them anything
question is, does the money they use to buy back stocks then no longer count as profit and is it no longer subject to taxes?
A wonderful discussion on economics. Too bad it's tagged on to a health care story. I always say had the good nuns known there was a profit to be made in taking care of the sick, maybe they wouldn't have gotten out of the "when I was sick, you comforted me" department?
Until these "Insurance Executives" develop a conscience and start behaving as American citizens, we are lost. Saving the "bottom line" is not necessarily "American". It is just so sickening that they would protect their investors over anything moral. (Their investors, as we learned with AIG, are not all American!)
It's bad when I feel sorry for my Doctor. We pay alot of money for our insurance every month because of our various health needs. We have what is considered premium and we go without alot of niceties, like basic furniture, for this. Doctor has to jack up his price to get a meager cut. When we get the Explanation of Benefits it shows he charged $5,000 to get $475. That was for a surgery. He has to pay his staff and rent and himself last out of that and he performed the surgery.
It's just CAPITALISM. Until the voters wake up, and develop a conscience this is what we have.
95% of the voters voted for dem/repubs and now have voters remorse. They could have voted for NADER. Anybody want to bet that more than 90% of the votes in the next election will be for the dem/repub candidates. Some people never learn.
This is such a great article. Unfortunately until we fix our democracy and get corporations out of the inequitable influence in government ALL PROGRAMS end up being a black hole.
Fair trade is an efficient equitable exchange between an entrepreneur and his customer. Free trade benefits only those who are the middlemen that do not produce a thing: bankers, advertisers, attorneys, and government officials. They all get the cut of your ideas and production. As entrepreneur, you need to use the principles that help the rich get richer. Because you will have to chose how many of those middlemen you allow a cut of your ideas to help you sell your product to your customers.
If people give money to robbers, they should expect to be robbed.
Most members of my family are poor. I'm poor myself, having been unemployed now for two years. We go without any insurance. My nephews are now adults and have gone their entire lives without insurance. It's not possible for all people, I realize, but it's possible for far more than expected.
We just don't get medical help unless it's an emergency. We've really only had one emergency between all of us. We just do what they did way back before there was insurance. We eat right. We exercise, we take care of ourselves and we minimize the need for help.
Apparently, it's either that or give money to robbers.
It's the conservative thing to do
This is not working, people. God forbid you or anyone you love is assaulted by an attacker meaning to kill you, but if this happens to you and yours, do you protest to that person? 40k a year dying for lack of insurance while the Health Insurance Execs reap rewards for scamming people out of their money and refusing to give service. That is murder, manslaughter, and an assault on those families....WHEN THE F**K IS SOMEONE GOING TO GET JUSTICE. Thank God this has never happened to me or mine cause I'll be damned to sit around with a damn sign while someone is trying to kill me or my family.
If you live in the US and you are being assaulted by these corps get militant and DEFEND YOUR LIFE AND YOUR FAMILY. Doing what you have to to survive is your GOD GIVEN RIGHT! Do not sit around waiting for this corrupt system make THEM FEEL YOUR PAIN.
Health cares soon to be declared a privilege ONLY for those that can afford it not a right. That will be the SCOTUS' next big removal of our rights as citizens. the system is only concerned about healthy profits going to the few not the health of the many. Were on our own now folks, this isn't going to stop till we somehow get together somehow and stop it.
Hmmm. If they are buying back their own stock, what would happen if their stock crashed and burned? What if everyone opted out of "for profit" health care plans?
They would crash and burn if only a significant minority opted out of their scheme.
Everytime I hear the word, "insurance" I think of the Mafia. They sold "insurance".
Your Mafia characterization is apt but you must realize that the answer to your "opted out" question has already been answered (with Obama's new "mandatory participation") and is the same as the Mafia's. That being: "You will buy our insurance product or else."
The insurance companies new they were delivering a downward spiraling product that was costing more and more with less and less coverage and that the public new this and was considering abandoning the sinking corporate hospital titanic, so they established the mandate clause where you can't opt out. They made a deal that our president and congressmen couldn't refuse...... campaign bribes and of course for the top government players, a cushy job at the money trough when then spin through the revolving door.