A STUDY OF PROFITABILITY IN THE UNITED STATES HEALTH INSURANCE INDUSTRY

The dissertation is a study of the determinants of profitability in the U.S. health insurance industry. Health economists have been concerned with measures of administrative efficiency and with legislated market advantages in explaining profitability. From their research these economists have drawn certain policy conclusions about the economic motivations and profit performance of the insurance carriers. Nonetheless, they have overlooked the profit effects of the carriers' actions as financial intermediaries. The study of these effects is the focus of this dissertation. The method of study is a combination of historical, industrial organization, and econometric research. The history is used to explain the evolution of market structure, government regulation, and the determinants of industry profitability. Industrial organization theory is necessary to understand the variables determining profitability. Econometrics is applied to financial data in order to elucidate the role of the carriers as financial intermediaries. The research indicates that the carriers act to expand their health insurance reserves. These are used not only to cover future expenses, but also to earn a financial return from investments. Profitability is primarily affected by this return on investment and secondarily by administrative efficiencies and legislated market advantages. The research implies that deregulation of the industry is ill-advised. Indeed, social control of health care financing through public ownership of the carriers' health insurance business may be more appropriate than the deregulation of the industry.