Over at Colorado Insurance Insider, Louise hosts Health Wonk Review, highlighting some of the best healthcare post of the past two weeks.
Many focus on what the new administration will or won’t do about healthcare reform. At the Covert Rationing Blog, Dr. Rich offers a particularly entertaining—and shrewd—assessment of the future of health insurance companies.
Unlike many observers, Dr. Rich understands that the insurers are desperate to see universal coverage as soon as possible because they need new customers—Now. Insurers assume that any reform plan will follow Obama’s model and include them, giving Americans a choice between public sector insurance and private sector plans. With the government providing subsides for low-income Americans, this means that insurers could look forward to tapping that pool of 47 million Americans who are now uninsured.
Of course, if the reform plan regulates insurers (as it must), they won’t be able to “cherry-pick” their customers. Nevertheless, Dr. Rich speculates (and this is the part that is, I think, particularly shrewd) that insurers were looking forward to “one last, huge windfall, in the form of government-provided premiums for some significant chunk of millions of uninsured Americans. Then, a couple of years later and having realized their final gains, they would get out of the health insurance business altogether and let the feds have the whole mess.”
In other words, he is suggesting, as I have, that if Americans are
offered a choice between public and private insurers—and if private
insurers are properly regulated—over a few years, more and more
Americans will choose the public sector “Medicare for All” alternative,
and for-profit private insurers will get out of the business. And they
will be happy to do so because at this point, health care costs are so high that it just isn’t a very lucrative business. They have hiked premiums about as high as they can without losing more and more customers. The only thing that has kept the insurers going for the last few years is the huge windfall bonus that they got from the Bush administration to cover Medicare Advantage patients. They know that bonus will be cut sharply—or eliminated—next year.
So for-profit insurers were hoping to cash in on universal coverage for
a couple of years, watch customers figure out that the government can
offer better coverage for less, and then go back to insuring property,
automobiles, and lives (which is what they did before they got into the
health insurance business in the 1980s)—leaving it to the government
figure out how to contain health care costs.
But now, Dr. Rich points out “things have changed.” Because of the
economic melt-down we’re probably not going to get universal coverage
in 2009.
“But if Obama-style healthcare reform…is delayed,” he writes, “the health insurance companies are
likely to be in deep trouble—and soon.
“The market value (i.e., stock price) of these companies completely
relies on their continued growth. Through the 1990s and for the first
half of this decade, their growth was spurred by the acquisition of
not-for-profit insurers at a tiny fraction of their real value, and on
mergers and acquisitions among insurers. But there are no more
non-profits to take over, and these companies have pretty much run out
the string on mergers. So, for the past few years their growth has
almost solely relied on their participation in government programs such
as the Medicare Advantage Plans . . . .”
He continues: “Panicked insurance company executives are not in a
pretty place. On top of a mounting recession in which their customers
(American businesses) are cutting back or failing, and during which
their own costs continue to increase at a double-digit rate of
inflation [thanks to runaway healthcare inflation], they now have to
face the likelihood that in spite of Mr. Obama’s election there won’t
be a massive infusion of government dollars into their businesses any
time soon. These poor souls are very likely casting about for a Plan B.
“And Plan B seems pretty obvious to DrRich. The path has been very recently blazed by others.
“Over the last two months it has become obvious that when businesses
vital to the public welfare are about to fail, the government has
little choice but to take them over. This was the case with AIG, with
Fanny and Freddy, and to a lesser extent with several major banks. We
now see the American auto industry lining up for a bailout/takeover. .
. .
“So if you are a health insurance executive, you are probably looking
at your current broken business model . . . and observing what is
happening with other ‘vital’ American industries in similar straits.
DrRich imagines that these executives have already resigned themselves
to a government takeover (indeed, this was the end-game they have long
planned once their last Obama windfall played itself out), and that
they are merely calculating the right moment for it. How best to divest
their stock before hinting that such a takeover is in the works? With
careful planning and negotiation, can some of the takeover money be
parlayed into executive bonuses, or at least into one last, extravagant
junket (a la AIG)? There is no real hurry, after all—whenever the
health insurance industry says it just can’t do this any more and that
the government needs to take over healthcare, then no matter which
other industries the government will have already acquired, what choice
will the feds have?”
This may seem deeply cynical—and I certainly hope the government won’t
wind up funding the funeral by coming up with the money for those
final executive junkets and bonuses. But everything Dr. Rich is saying
fits with what I know about the finances of the for-profit insurance
industry. They are in deep trouble. Universal coverage—tomorrow—was
their only hope.
Other highlights of Health Wonk Review: at Managed Care Matters,
Joe Paduda is predicting more health care cost increases as an
unwelcome side dish to accompany our various economic woes while David
Harlow from Health Blawg interviewed Don Berwick, CEO of the Institute for Healthcare Improvement about ways to reduce costs and increase efficiency.
Jason Shafrin at Healthcare Economist
observes that the $700 billion that we are paying to bail out the
banking industry equals what the US health care industry wastes every
year in unnecessary medical tests and procedures that don’t improve
patient outcomes.
At Health Care Renewal,
Roy Poses writes about the conviction of Lance Poulsen, founder and CEO
of National Century Financial Enterprises, on fraud charges that read
like a mobster’s rap sheet: money laundering, securities fraud, and
wire fraud.
Finally, on The Health Care Blog Brian Klepper and David Kibbe from are calling on health plans to re-empower the primary care physician.
And this is only a sampling of very interesting posts written recently.
Well, I work in the health insurance industry and have a pretty good sense of attitudes among decision makers. My take is that this analysis goes way too far. I’ll take it part by part:
HB: Dr. Rich speculates (and this is the part that is, I think, particularly shrewd) that insurers were looking forward to “one last, huge windfall, in the form of government-provided premiums for some significant chunk of millions of uninsured Americans. Then, a couple of years later and having realized their final gains, they would get out of the health insurance business altogether and let the feds have the whole mess.”
JD: I’m no Nate Silver, but I’d say the chances that this is really what most executives think is less than 1%. Yes, private insurers want multi-payer universal health care in large part so that they can get a windfall gain. But no one in any private conversation I’ve ever heard at any level in health insurance has expressed a desire to abandon the business after that windfall happens. Nor do people in the industry believe they will need to. More on why they think this below.
HB: In other words, he is suggesting, as I have, that if Americans are offered a choice between public and private insurers—and if private insurers are properly regulated—over a few years, more and more Americans will choose the public sector “Medicare for All” alternative, and for-profit private insurers will get out of the business.
JD: Private insurers are not in general happy about having to compete with a public option. It will have a built-in advantage of lower administrative costs that could be as much as 10% of premium. However, the real question for a public option is the rate it pays physicians. It won’t negotiate like private insurers do, but set rates like Medicare does. Politics will determine what these rates look like, and it’s totally unclear at this point whether private insurers will be able to offer competitive rates, or whether paying higher rates will actually create a market niche in which they can continue to exist (for providers who don’t accept the lower public rate, or providers who may be allowed to give special treatment to privately insured people such as shorter waits for some treatments). Don’t forget that private insurers exist in almost every nation. Usually in a relatively small role compared to the US, but they have a role to play nonetheless.
HB: And they will be happy to do so because at this point, health care costs are so high that it just isn’t a very lucrative business.
JD: This is just not right. Margins today are basically the same as they have been for decades. It has always been a low margin business. But with the growth in medical costs, health insurers have also outpaced the growth in the economy for decades both in revenue and profit. And in any case, how many industries disappear just because they are low margin? The only thing I can imagine along these lines is that the publicly-traded companies try to leave the business and non-profits take up the slack. But even that I just don’t see unless new legislation creates regulations they feel they can’t put up with.
HB: They have hiked premiums about as high as they can without losing more and more customers. The only thing that has kept the insurers going for the last few years is the huge windfall bonus that they got from the Bush administration to cover Medicare Advantage patients.
JD: Not to be harsh, but this is really uninformed. A few companies have been helped quite a bit by Medicare Advantage (particularly PFFS), and in a very few cases it has made the difference between increased profitability and stagnant or declining earnings. Humana is probably the strongest case for the point of view expressed above, but it is the extreme and not the norm for the impact of Medicare Advantage in the last 4 years. The industry does not live or die by Medicare Advantage. It’s very important not to forget that if 1% drop coverage in a given year, but medical costs and thus premiums go up by 8%, that’s a net revenue increase of 7%. That’s the kind of trade-off health insurers have faced for the last 10 years and would expect to face until some breaking point is hit and major health care reform arrives.
HB: They know that [Medicare Advantage] bonus will be cut sharply—or eliminated—next year.
JD: Yes, and they will have to adjust accordingly. It may well force some to get out of Medicare Advantage. That’s a good thing, because these companies weren’t providing added value. The most important thing to consider is that generally companies adapt (yes, with exceptions, such as GM). If private insurers are forced to compete with a public option, they will look for a way to make it work. They might become “premium” options. They might continue to exist only for the large group ERISA market…that is, as TPAs to self-insuring corporations. Or, they might revert to stronger utilization and cost controls like HMOs did before 1998. I’m sure we could think of other possibilities that aren’t so far from roles that private insurers already play.
In short, you could say that i don’t find the analysis from Dr. Rich shrewd.
jd–
Thanks for your substantive comment.
But I have to say that in many ways Dr.
Rich is right in assessing the insurance industry’s woes. I follow the stock market, and read the better analysts. I also read Bob Laslewski who knows the industry well.
Margins haven’t changed, but loss of customers has hurt the industry. Health care inflation has hurt the industry.
And Humana is not the only company that was bailed out by MA. Most of the biggest companies did substantial MA business.
As for why I think for-profit insurers would have trouble competing with a public sector alternative:
the industry will be tightly regulated. It will have to be.
With Obama in the White House, we know that he will insist on community rating and guaranteed insurance. He also will
insist on comprehensive policies. No more cheap policies that provide little value.
You are quite right that private insurers may establish niches by paying doctors more. Though if they seem to be siphoning
doctors off from the general propulation, I can see the govt’ getting involved. . .
The very best insurers will survive. (Kaiser, for instance–and Kaiser would be very happy not to have to compete with some of the for-profits that it now muct compete with in California. Kaiser did not want to offer a high-deductible plan; the CEO told me it was “bad public policy” but if they wanted to compete in that market, they had no choice. . .
As you say, in Europe private insurers play some role–as I think some will here. But it will be a much smaller industry, and the insurers will have to play a much more honest game. No more avoiding sick people, or refusing to cover something because it was “a pre-existing condition.)
Finally, it’s worth remembering that for-profit insurers were not even in the health insurance business until after 1980, when Reagan changed a tax law that gave not-for-profit insurers such an advantage that for-profits didn’t try to get into the market.
There are some murmurings in Washington about going back to giving non-profits tax breaks. . .
Maggie Writes:
“You are quite right that private insurers may establish niches by paying doctors more. Though if they seem to be siphoning
doctors off from the general propulation, I can see the govt’ getting involved. . .”
————
Universal access to care is not the same as universal insurance coverage. To me, the biggest threat to our system now and under some reform ideas is universal coverage without keeping an eye on access. If you don’t set up your system with access in mind, you are tap dancing around the real issue, and the unintended consequences will be no access for some and/or large queues for needed care for many others.
If you are going to solve the problem, keep the desired endpoints in mind when you set up your solution. The ostrich tactic will not work here, and especially if you know for certain beforehand what will happen.!
Maggie,
I’m sure we’ve ready many of the same Wall Street analysts and health care policy analysts (I’m also sure you’ve read more of them than I have). I agree with many of the points about how private insurers have been squeezed and would be squeezed further in a UHC system with a public payer option.
My objection wasn’t to that so much as to the claim that insurers were thinking of bailing out of the business. I see no evidence of that.
You note the distinction between non-profit and for-profit insurers, and that is a distinction that is likely to get more important in a UHC system. Kaiser and other non-profits can exist perfectly well when margins are flat at 1%-3% (enough to invest in system improvements) and revenues increase at the same rate as the economy as a whole or less.
That is not the kind of business that publicly-traded companies prefer to be in, as you know. But that doesn’t mean they will get out of the business if real reform comes and regulations strongly constrain them. What it means is that the for-profits will fight to prevent it from happening, because it would make a big hit on their share price and shareholder value, and they’d have to re-think how they compete. As the saying goes: there are easy ways to make money and hard ways to make money, and companies will always take easy ways to make money unless you force them to take the hard ways.
Ng and JD thanks for your comments.
NG – I absolutely agree—equally high quality and efficient care for all must
be the end-goal.
I really worry that “universal coverage” is going to end in a
two tier (or three their ) system that belies the name.
That’s one reason why I think we should take our time in rolling out
universal coverage—thinking it through (taking our heads out of the sand
and thinking clearly about how to regulate insurers.
JD—
Now I have a better understanding of your objection. I agree in the sense that I have
no idea what goes on in the minds of executives in the insurance industry. If anything, I have to say
that Dr. Rich may well be granting them too much of foresight (If If they were better at long-term
thinking, they might have done a much better job of “managing care”—managing on quality,
nor price, and be in a much better position today.
But, as you say,unless forced to do otherwise, for-profit companies will
make money the easy way.
I also agree that HCR could be a boon for non-profit insurers who could compete against
a public sector plan, help keep it honest (insofar as lobbyists will try to corrupt it) and
perhaps bring some new thinking to the table.
But as your say, for-profits will fight meaningful reform with all of their might. I am coming
to believe that for profit insurers may be a major force behind the seemingly progressive push to
Reform HealthCare NOW. The quicker we do it, the less likely it is that we will fight the
hard battles with the lobbyists, and the more likely it is that Health Care Reform will become a
series of quick compromises with many unintended consequences.