Democrats Cast Health Insurers as Villains
But Can Companies in the Red Really Afford to Cap Premiums?
Oct 21, 2009
Something for investors to consider is that the outcome of the clash shaping up between advocates of the Obama plan and health insurers could affect the latter's financial prospects as far out as 2015, maybe longer.
The industry's embattled managers know that the enormous new customer base the bill represents, attended by new costs and health risks, could start a long-term trend of earnings gains or one of stasis.
Some indication of the elevated passion in the rhetoric comes from Reuters online of October 17, quoting President Obama in his weekly radio broadcast: "Every time we get close to passing reform, the health insurance companies produce these phony studies as a prescription and say, 'Take one of these and call us in a decade.' Well, not this time."
House Speaker Embraces Health Insurance Public Option
House Speaker Nancy Pelosi and other critics say those insurers are fighting hardest against a provision in any bill that would create a "public insurance option"; that is, a government-run health insurer that would compete with private ones, in order to keep premiums and medical costs low.
The Speaker was quoted in the article Pelosi Shapes Bill for Liberal Votes, appearing in "Roll Call News" online of October 15. She said that since the bill closest to a consensus and championed by Democratic Senator Max Baucus of Montana requires citizens to purchase health insurance, how can the government do less than provide a low-cost version to citizens unable to afford private brands?
Public Option Proponents Want to Keep Private Companies Honest
Proponents of the inclusion say such an insurer of last resort would keep private ones honest. Besides providing affordable premiums and underwriting higher-risk patients who are turned down elsewhere, they would restrain health costs from rising as fast as they have been.
Moderates say an alternative to allow the formation of health insurance cooperatives, rather than a government enterprise, is gaining favor and could replace a direct role by the government in the measure.
Families USA Director Slams Insurers for Premium Increases
On another issue, Ron Pollack, Executive Director of the consumer health organization Families USA, charges:
"The insurance lobby now claims that health care reform will cause significant premium increases, conveniently forgetting that they imposed significant premium increases during the past decade that are making health coverage unaffordable for families and businesses."
He is referring to the decade of 2000 to 2009, when, his organization reports average family insurance premiums for employer-based health coverage increased from $6,772 to $13,073 or 93%, while median worker earnings rose by only 19%.
Senate Bill Likely to Form Basis for Consensus
A bill is scheduled to emerge from the Senate Finance Committee soon, to begin its merger into other associated bills and continue a give-and-take journey through Congress.
Managers are trying to draw bipartisan support from Democrats and Republicans, as well as health professionals, hospitals, pharmaceutical makers, health equipment suppliers and consumers. Senator Olympia Snowe of Maine is the first Republican to subscribe to the Democratic bill.
Health Insurers Oppose Government Insurance Company
There can be little doubt that health insurers are girded for a colossal effort, to defeat any public insurance option. OpenSecrets.org.- representing the Center for Responsive Politics- reports the health insurance industry has spent $3.5 million in 2009 on lobbying efforts.
Are Health Insurers Really the Villains in This Melodrama?
Arguably, health insurers are the villains in this political drama. If so, it is possible the reason they are throwing so much money and vitriol into influencing the final bill is that they can ill afford a bill that restrains premium increases, judging from the financial statements of the largest of them.
They are not the reports of companies raking in the dough, at least for the benefit of shareholders. In fact, their records are pretty dismal, in recent years. As the exhibit below shows, after three years of losses through 2008, in recent quarters most are in the black.
Largest Health Insurers Lost 5% Annually in Past Three Years
In an industry with a total stock market capitalization of $40 billion, in the past three years the ten biggest companies lost nearly 5% annually, on average. In the past four quarters, however, the group's net income available for common shares jumped by 9.2%.
AFLAC led the way, jacking up income by 33% and causing that outrageous duck to swagger even more in TV spots. Unum and Triple-S followed, with gains of 25.4% and 18.5%, respectively. Only Wesco Financial Corp., Eastern Insurance Holdings and American Independence Corp. reported losses in recent quarters.
New Law Would Enroll Around 30 Million New Customers
The new legislation would enroll around 30 million Americans in health insurance programs for the first time. Nobody knows their health status, and that is a situation abhorrent to health insurers. Like other underwriters, their premium structures are based on probabilities.
In all fairness, can they be blamed for balking at freezing premiums as the government hands them the responsibility of insuring millions of uninsured new prospects?
White House Asking Insurers to Limit Revenues Before Knowing Costs
The crux of the problem for health care insurers is they have not had the chance to analyze the risks they might be assuming. Of course, it is possible the premium hikes of this decade would enable them to operate profitably. Even so, at this point agreeing to limit or freeze premium increases would be a dice throw for them, even when handed a huge new market on a silver platter bearing the federal seal.
* The writer is a Chartered Financial Analyst (CFA).
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