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?

2 thoughts on “Flavors of Insurance, Part VII (Health)

  1. I think ObamaCare will be repealed in 2+ years, perhaps even sooner. The reason, as you point out, is the baby boomer generation.

    Quite simply, the costs of the current system are too high. Projections from the not-too-partisan Government Accounting Office (GAO) say ObamaCare will not result in much savings, if any.

    This is really common sense, and should not have required an expensive study. You can’t cover 330 million people for the same cost as 300 million.

    As a person gets older, they tend to require a greater amount of health care – meaning the baby boomers are going to make a bad cost situation even worse.

    There are two aspects of ObamaCare: *what* was passed, and *HOW* it was passed.

    The *what* part is of course controversial, and David explained some of the conflicting objectives above. It will take the country a few tries to correctly “balance” those conflicts.

    The **HOW** ObamaCare was passed is the reason it has no future. A combination of fraud, open bribery, and backroom deals behind closed doors.

    Depending on the pollster, something close to 63% of the country opposed ObamaCare. That doesn’t mean people don’t want health care reform — but we didn’t want THIS plan.

    Congress stuck their middle fingers up at the electorate, and jammed through a package we didn’t want. Then they had the nerve to act surprised when they got slaughtered last November. I seriously doubt the vote was really pro-Republican, so much as it was anti-Pelosi and her strategy of giving voters the finger.

    Because of the way ObamaCare was jammed through (not really passed) — it is not a foundation that can be built on.

    Deciding how to balance conflicting objectives and rising demand / constrained supply is going to be a very difficult task already. If we have to stop each step and argue about the illegal tactics used to get Congress in the middle — the task becomes impossible

    Either ObamaCare gets repealed and we start over, or the baby boomer generation gets healthcare equivalent of public housing. ObamaCare does not have popular support; rightly or wrongly, it has become a symbol of the corruption of Washington DC.

    I doubt the baby boomers will accept having their retirement years held hostage to debates of government corruption.

    Unfortunately, when we get a new proposal for health reform (one that looks at successful programs to contain costs like Mayo Clinic?) — the hurdle to pass anything is now much higher.

    It takes “the bigger man” (woman) to be the first one to apologize / admit you were wrong. The leadership in Washington (both parties) are like a bunch of three year olds, not the sort that will swallow their pride for the greater good.

  2. I don’t care to opine on or make projections about the success of the health insurers. However, I like the idea of playing the “greying baby boomer” demographic trend from the angle of medical product companies.

    I own JNJ, but I admit that it is not exactly an exciting company and not likely to make any major moves up. I was attracted to the dividend and relatively low volatility in the common stock.

    I think that people can also play the aging trend with medical device makers and big pharma (if you know how to analyze a pipeline–I don’t).

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