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Time to Rethink Our View of Private Health Insurers?

by: Michael Steinberg September 04, 2008 | about stocks: UNH / WLP    

Michael Steinberg

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The Wall Street Journal  “Price Strategy Puts WellPoint in Bind” reports that the CEO of America’s largest health insurer, Angela Braly, is having difficulty balancing shareholders' need for profits with unaffordable premiums. To cope with rising medical expenses,  WellPoint (WLP), sharply increased premiums. WellPoint lost 189,000 members in the first six months of 2008 and predicts 150,000 more will be lost by year end. Now neither shareholders nor policy holders are happy.

WellPoint’s membership loss story parallels UnitedHealth Group (UNH) membership losses, with some interesting twists. Premium increases had to be more dramatic because its increased medical costs took WellPoint by surprise. “Lengthy consolidation of old claims-processing systems” delayed claims processing and the revelation of increasing medical cost trends.

Another surprise was that high deductable, consumer-driven health plans did not behave as envisioned. Employers were supplementing the high deductable plans with employer funded health savings accounts, making the deductables irrelevant from the employees’ perspective. Employees did not curtail their use of medical services in these plans as planned. WellPoint’s response was to dramatically raise the premiums for high deductable plans.

Unfortunately, the history that created WellPoint cannot be undone. WellPoint is an amalgamation of several formally non-profit Blue Cross plans converted to for-profit and merged. Does WellPoint’s origin convey upon it a certain degree of public mission in a manner similar to the Fannie Mae (FMN) and Freddie Mac (FRE)? Does WellPoint’s increasing dependence on Medicare for membership growth also carry an implied “contract” to forego some profits and provide lower premiums?

I think the GSE precedent applied to private health insurers is becoming more relevant every day. Both WellPoint and UnitedHealth are steadily shifting from “at risk” business to becoming plan administrators for the self-insured corporations and feeding off the government Medicare and Medicaid trough. When companies become especially heavy feeders from the government trough, they take on an implied social responsibility. Shareholders who refuse to acknowledge this are naive.

The United States is the only “first world” country that does not provide some form of national healthcare. Instead we “license” the work to private health insurance companies. Should these private health insurers pay a price for the government giving up its right to provide national healthcare or national health insurance? Should that price be the elimination of medical underwriting, community rating, coverage standards and premium caps?

Shareholders need to start viewing private health insurance companies as utilities; safe, low margin, slow growing businesses. Private insurers need to refocus themselves into public servants. This will become the new reality, regardless of which party wins the White House.

Disclosure: Author is long FNM, FRE and UNH.

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This article has 4 comments:

  •  
    Sep 04 10:50 AM
    "Employers were supplementing the high deductable plans with employer funded health savings accounts, making the deductables irrelevant from the employees’ perspective."

    A clarification, from someone who actually is on this kind of health plan. What happens is that the employee has the option to direct some portion of their pay into the tax-free Health Savings Account (HSA). This account is "funded by the employer" only in the sense that the employee's salary is funded by the employer. For all practical purposes, the employee is paying into it.

    Then the employee can use HSA to pay for healthcare expenses not covered by your insurance, such as co-pays and deductible. However, even with the bump-up for the HSA being tax-free, it comes down to a cost being shifted from insurer to insured employee. The employee does NOT perceive the costs as irrelevant!

    What's more, in every one of these I've participated in, HSA is "use it or lose it" each year. If at the end of the year you've been healthy and haven't spent your whole HSA, you just lose whatever chunk of your salary you directed to the HSA! Obvious incentive to underfund your HSA (even with the tax effect) from what you think you will spend, especially if you're in good health.

    Someone with a high deductible would probably consider putting less than the deductible into the HSA and just hoping for the best.

    I've never understood who this goofy system was supposed to benefit, except whoever is administering it (usually company HR dept) and whoever keeps any unused balance in HSA (I guess that's the employer too?)
    Reply
  •  
    Sep 04 02:04 PM
    Sounds like it would be smarter to set aside that same amount in a stock or etf, or even just a savings account, then into something more reliable like a CD, and keep it building so that when you need it, you have it. I'm not putting any of my pay into anything that I can't control or at least withdraw from.
    Reply
  •  
    Sep 05 12:13 AM
    Selene: you are mostly right, but not 100%. My employer also puts money into our FSA if we complete a health survey every year. The amount doubled this year. So, yes, *some* employer funds can be included.

    Whisper: your solution is often touted by grandstanding politicians, which is enough to make me skeptical (only slightly tongue-in-cheek). Seriously, it sounds great in theory but won't work for the rank-and-file. Look at today's DOW drop-- stocks across the board were eviscerated. And that's just one bad day in a long steady decline. Plus, the average consumer really has no clue how to invest. Also, savings accounts are a joke-- paying about 3% if you're lucky compared to the real inflation rate of 10% or more (remember, the figures the government use for CPI leave out energy costs, housing, and conveniently, health care). Bottom line: no savings in savings. Just an illusion.

    The real solution is to go back to a not-for-profit model across the board. Yes, there were inefficiencies, but they sure the heck beat the monstrosity we've allowed to grow over the past decades. Give me a church-owned-and-run hospital full of cranky old nuns over the nightmare that for-profit hospitals have become...
    Reply
  •  
    Sep 09 05:17 PM
    The person who posted about HSA's being subject to "use it or lose it" is just plain wrong. FSA's have this provision, but HSA's don't. They are two different animals. Also, to the point about who is contributing/funding the HSA, both the employee and employer can put money into the accounts. The employer who funds an HSA is giving you "free money," much like the matching 401(k) contribution an employer makes on your behalf. The amount that an employer puts in your HSA for you is irrevocable; it's yours the day it goes in the account and the employer can't dictate how, if or where you spend it. And, funds not spent at the end of the year stay right where they are and accumulate interest all the while.
    Reply
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