Further to our research regarding the profitability of various industry segments and sectors, Terry & Company took a hard look at the profitability of various businesses. We spent a lot of time analyzing various industries, markets, sectors, segments, lines of business, etc.

Some define “sectors” as distinct subsets of a market, industry, or economy, whose components have similar characteristics. Analyzing businesses from a more “macro” standpoint requires breaking industries into smaller sectors depending upon the company’s line or lines of business.

One analytical company divides the U.., economy (and stock markets) into eleven “sectors”, of which two are called “defensive” (utilities and consumer staples) because these businesses areas, allegedly at least, tend to suffer less during economic downturns, though there seem to be few places to hide in this economy. Other sectors may be described and categorized as “growth” or “cyclical”. One way of making a gross categorization of industries is to divide them among areas such as transportation, technology, health care, financial, energy, consumer cyclicals, basic materials, capital goods, and communications services. Other analytical companies divide the market into different sector categorizations, and sometimes break them down further into sub-sectors.

One can easily see how the Energy business might be divided among oil exploration, distribution, refining, retailing, natural gas vs. oil vs. solar, etc. Metals can be divided among exploration, mining, services, fabrication, vertically integrated production, distribution and so forth.

The complications – or at least variations - in categorizing industries, markets and segments, by the way, can be understood just by the fact that “health care insurance” can be considered under the larger group of insurance, along with property / casualty, life, annuities (which themselves are categorized, too, under financial services), high-risk insurance, auto, etc. In fact, “high risk” is really considered a sub-segment under each particular type of insurance, so there is a “high-risk” component of auto, aircraft, property, etc.

There are plenty of myths about the profitability of health care in general and perhaps the Big Myth, some refer to it as the Big Lie, is the profitability of the Health Insurance Industry or sector. Terry & Company and valueletter.org have reviewed and analyzed copious information on industry profitability from many sources and compiled a good picture of the profitability of selected markets or sectors, twenty-six of them in all.

While the incumbent administration, congressional leadership and many others - including the man on the street - work hard to demonize the health care insurance industry, it’s really a perpetuation of a Big Myth, or as they try to euphemistically put it in the South . . . “those people are just telling you tales.”

And by the way, Terry & Company, who is responsible for putting together this analysis, has no clients in the health insurance business and does not seek such business. We took what one might consider an intellectual interest or curiosity in the “real truth” or “true facts”, as many like to redundantly say, and we set out to find out what was the record as far as various companies’ profitability. We weren’t shocked, we must admit. It was no surprise that, in terms of core profitability, the Health Care Insurance industry ranks 17th out of the 26 industries we looked at. After many years as an executive in several industries and with a Wharton MBA, Michael Terry has had a good sense about the relative profitability of different industries for many years.

We might note that pure “profitability” as measured by profit margin percentages is not the whole story either. It’s really a first glace at understanding industries, stock the economy and in current affairs, the politics of health care legislation. Various industries have different risks, government regulation, investment in research and development, capital structures (debt and equity levels), levels of inventories. All of these have an impact on rates of return, investment, and profitability. One way to put it might be that just because networking, natural resources and ’big pharma” have the highest profit margins doesn’t mean that these stocks of these companies are necessarily any better investments than those of lower margin business, such as beverages or food production.

What’s important about our analysis is that it shows empirically . . . proves . . . that pharmaceuticals are hugely more profitable than health insurance. Then why, you ask, would those want health care legislation want to vilify health care insurance companies and joint venture with big pharmaceutical companies in an effort to get legislation passed. The reasons are simple and complicated at the same time. One might say “follow the money” and look the deal done between the administration and Big Pharma. Also, it’s easier, simpler to deal anecdotally with Mary, or Jim, or Joe or Peter who has had a bad experience with his or her health care insurance company than it is to deal with the facts.

In fact, you’ll see by reviewing our research below that Health Care Insurance is only about a third as profitable as pharmaceutical industry and only about three-quarters as profitable as the average American company. That is, health care insurance is less profitable than the average company in America . So the next time you good looking for the “bad guy” or trying to find out who your enemy is, make sure you do the hard spade work, do the analytical analyses that will bring out the truth. If you need to shed a tear for anyone it’s not our huge pharmaceutical companies or medical equipment and products makers. Shed a tear – or maybe not! – for homebuilders, diversified financial companies, and auto parts an auto supply firms. But don’t forget that all these dogs had their day, too! Just remember, don’t go assuming that somehow your health care insurance company is making a fortune on you or your neighbor, or that the proposed health care legislation is going to make your health care any more affordable or improve access.

——————————————————————-

[1] copyright Michael Terry, Terry & Company, valueletter.org

This entry was posted 2 years, 3 months ago on Monday, November 16th, 2009 at 9:43 am and is filed under November.

Comments are closed.