[phil21]

Hospitals and clinics can only take so many Medicare patients as a ratio to private pay because it’s very well known that Medicare and Medicaid is often provided at below cost. It’s of course area and demographic dependent but as a rule any private clinic has a cap on these patients they will accept overall. Hospitals cannot cap it realistically speaking, so looking at clinics is a good proxy.

Private insurance subsidizes Medicare and Medicaid even after you add in admin overhead.

[rexroad]

The MLR incentive question is one I'm digging into for a future issue. The short version: the ACA's 80/85% MLR floor was supposed to constrain overhead, but vertical integration changed the math. When UnitedHealth's Optum division provides services to UnitedHealthcare's members, those internal payments count as "medical expenses" for MLR purposes. The money stays in-house but reports as care delivery. On the denial rate point: 15-17% initial denial rate, 80%+ overturned on appeal, but less than 1% of patients actually appeal. That gap between the overturn rate and the appeal rate is where the profit lives. If you deny 100 claims and only 1 patient appeals, you've effectively reduced payouts on 99 claims at the cost of processing 1 appeal. I'll have the numbers on this in a later issue.

[lotsofpulp]

> That gap between the overturn rate and the appeal rate is where the profit lives.

Or doesn’t live.

https://www.macrotrends.net/stocks/charts/UNH/unitedhealth-g...

All the other managed care organizations have similar 2% profit margins.

It is funny seeing complaints of excess profit margins from businesses earning 2%, that compete against non profits, from people on a forum composed of employees of tech businesses earning 20%+ profit margins. I wonder how much Epics’s profit margin is?

And then there is also pharmaceuticals, also earning double digit profit margins. And then the law firms in medical malpractice suits, who I imagine are not working for 2% profit margins either.

[Retric]

Profit margins are difficult to compare across industries, game developers on average have great profit margins in part because all the studios that fail quickly stop counting.

Grocery stores on the other hand are a known as a low margin business, but as people constantly need more food every month it can be really stable. Further as most stock turns over multiple times a month your return on capital can be extremely high. Even better during a downturn when people buy 20% less food you also need to buy 20% less stock and employ fewer people to stock shelves etc, which makes your profits far more resilient.

Suddenly grocery stores are looking like a much better investment than making games.

[lotsofpulp]

The point of a profit margin is to be able to compare a seller's pricing power across industries. It invalidates attempts to claim the seller is able unilaterally act in their interests without the customer having recourse. For insurers, not only do customers have a choice to switch to a different insurer, but insurance prices have to be approved by government employees.

And total returns are the end all, be all for measuring investment performance. Just because some volatile video game businesses go bust does not make the grocery business or insurance business attractive. I could just as easily put my money into SP500 and earn far more with far less (almost zero) risk.

[Retric]

> It invalidates attempts to claim the seller is able unilaterally act in their interests without the customer having recourse.

By that logic the cap’s on annual profits by insurance companies suggest significant pricing power by insurers.

As to S&P vs a grocery store, there are grocery chains in the S&P there’s nothing wrong with the business model. As always the arguments for starting a business are more complicated than the alternatives due to the amount of leverage you can get etc. Further a weekly turnover at 2% is a rather insane annual ROI, we’re talking 100% return on investment though obviously actual business don’t just concern themselves with groceries, labor, and rent.

[lotsofpulp]

>By that logic the cap’s on annual profits by insurance companies suggest significant pricing power by insurers.

I disagree. If I was a seller, and if I had pricing power, then I would not settle for a 2% profit margin when the cap is 15% or more. The only reason I would settle for 2% is because I cannot sell for my product or service at higher prices or in higher volumes to get more than 2%.

>Further a weekly turnover at 2% is a rather insane annual ROI, we’re talking 100% return on investment

I don't know what definition of return on investment you are using, but it does not match any that I am familiar with based on share price and dividend history of any publicly listed grocer (kroger/albertsons/walmart/target). Obviously, Costco has done well, and Amazon, but those are not strictly due to selling groceries, or retail in general.