Flavors of Insurance, Part VII (Health)

Health insurers have changed over the past thirty years. Thirty years ago, health insurers were strictly indemnity-based, and there were many of them. Many multiline insurers had health insurance subsidiaries. The creation of HMOs and Preferred Provider Organizations [PPOs] were innovations that helped lead to a consolidation in the sector. Today few health insurance providers are part of multiline insurers. Health insurers are specialists.

Another trend among health insurance is the slow but steady demutualization of Blue Cross/Blue Shield affiliates. The greatest expression of this is found in the merger of Anthem and Wellpoint, where the combined entity covers thirteen states, and makes it the second largest health insurance provider in the US.

Health insurance only became a profitable venture on an underwriting basis recently. If you added up underwriting profits and losses from health insurance through the 1990s, the profitability was breakeven. Since then, expense control on medical providers and at health insurers helped bring the group to sustained profitability. Part of that might be attributable to larger health insurance companies gaining additional bargaining power. The increase in market share of the major health insurers has helped to raise barriers to entry in the space. It is difficult to replicate the advantages of the largest health insurers in terms of buying power, or in terms of the ability to service national accounts.

People in the United States want the best of two incompatible worlds with health care. They want it to be inexpensive to users, and yet be available “on demand” with services of the highest-tech nature. Individuals and firms want it to be socialistic if their own costs are heavy, and “free market” if they are small. Add onto this the demand of perfection of results, enforced by tort attorneys, which drives up costs. Doctors practice defensive medicine in order to avoid malpractice claims, which is costly.

Because of their buying power, government-related purchasers of health care also tend to be price-sensitive purchasers of health care, leading health care providers to shift costs to private purchasers that are price-insensitive in the short run. Health insurers are middlemen in this situation, attempting to deal with the conflicting goals of controlling costs, while providing an amount of services that keeps users of the system happy.

Because of the foregoing, costs have been rising at rates in excess of the inflation rate in the general economy. There is consistent political pressure against the profits of health insurers, but it has not affected profit margins over the past three years. The health insurers have been able to pass through their cost increases so far, but the possibility of government actions makes future results less predictable.

The stock performance of the health insurers was fairly flat through the end of the nineties. In the 2000s, return improved dramatically, due to the advantages of scale and expense control. The advantage of scale is not going away, but the above average profits of the last four years may prove difficult to maintain, as the government will find it difficult to not increase regulation in response to complaints over high health insurance premiums in the face of what are viewed as high profits.

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Bringing it to the Present

After fighting off federal regulation 2004-2008, health insurers did a deal with the devil, deciding that it would be better to be health utilities than dead.  At this point, I do not know how things will go:

  • Will ObamaCare be ripped out two+ years from now?
  • Will ObamaCare be defunded?
  • Will ObamaCare persist?
  • And if there are changes, what will replace the current system?

The one thing presently in favor of the health insurers is the graying of the Baby Boomers.  There will be increased need, but how will it be filled?