HEALTH PLANS: I agree wth the NY Times in general, but perhaps someone should tell Wellpoint that they are doing badly

So yesterday the NY Times has an article suggesting that the good times are over for health insurers. In the last five years they’ve seen huge growth and profits while they’ve retreated from active care management and trying to push provider prices down and instead have returned to their roots as underwriting, financial machines that simply pass on the costs of the system to their clients (i.e. us). Well that’s not exactly what the article says they’ve been doing, but it is what they have been doing. I tend to agree with the NY Times, as I don’t think that the profit growth of the Uniteds and Aetnas is sustainable over the next few years. However, no one bothered to mention this to Wellpoint which this morning announced earnings that blew the doors off expectations and sent the Wellpoint stock price up 6%.


And of course the way the health care business works — remember that 85% of the costs are with 15% of the people — even if your overall enrollment isn’t going up very fast, you just need to get better at avoiding a few expensive enrollees to be very profitable. If you can figure out some way to at least start to manage the care of the sick people you do enroll better — and to be fair Sam Nussbaum at Wellpoint does seem to be trying to do this with diabetics — then you may still make some decent profits so long as you get your pricing right. So there’s your reason why shorting Wellpoint may be a bad, even if very tempting, idea. It of course may not be enough to stop me from being stupid and doing it anyway.

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11 replies »

  1. Not only are they stealing from memners they have raped employees. Since the Anthem WellPoint merger, we have lost our retirement, lost vacation days, our health care premiums have been doubled. Whe are told to leave if we don’t like it. Anthem, was, before wellpoint a “great place to work”. Money, power and greed has changed all that.

  2. I have been in the industry for sometime, but I still find it valuable to see other people’s views and opinions about what I do. So I really appreciate your comments and insights. I am not trying to proselytize anyone on the virtures of Insurance companies. I am just one more voice in the debate that has a difference perspective.
    Denial of care issues are touchy. Its hard to glean from an article what really occured. But usually such decisions (good or bad) are based on interpretations of the contract. Hence, the extinction of the term “medically necessary” in contract. That phrase is just to subjective. Medically necessary based on who’s judgement? That’s why HMOs got in trouble.
    Insurance contracts are complex, just like any health care system would be. They pay for somethings and not others. What happens is when people when exceptions for totally viable reasons. The case is made, where is you heart?
    From the article it seems that treatment was stopped after it was approved but that’s hard to agree with. If the insurer actually approved payment and then stopped their stupid, and liable. If the doctor assumed it would be paid and then found it wasn’t the doctor is stupid. I luv how the article claims that treatment was stopped by the insurer. I didn’t know insurers can actually do that. The fact is the insurer stopped payment, not treatment. The doctor is more than welcomed to continue to treat the patient at some negotiated cost (but we all know he won’t do that).
    Its tough, because if it were me I would be pissed and lawyer-up. Especially with vague language in the contract.
    Again, if the term “medically necessary” is in the contract the insurer is stupid and should be made to pay. An insurer is not medical professional.

  3. Okay, fair enough. You make a point when you say both sides are equally culpable to a degree. (At least I think that’s one part of what you’re saying.) And you may well be right.
    I don’t have the kind of in-depth industry knowledge to debate the issue with you. I was more interested in your reaction, which I now have in front of me.
    But what about the denial of care issue which the article touches on?
    Are you arguing that this isn’t a problem? Or that this is simply an AMA trick?
    This, it seems to me is one of the issues which really frightens and worries people in the current health care system.
    Lets face it, in a beauty contest, insurers have problems by definition. Its not easy for large sprawling bureaucracies to sell themselves as either human or likeable in the first place. That process becomes even more difficult when the business is health care.

  4. Oh, my God Doctor’s suing Insurance companies!!!!! The industry must be going to hell in a handbasket. C’mon there is nothing new here.
    Doctor’s suing Insurance companies alleging conspiracy is nothing new, and simply a heavy-handed negotiating tactic. The same could be argued against doctor’s who consipire to upcode in effor to get paid more (take more of that premium dollar).
    Insurance contracts are just that, contracts. There is no abstract sense of coverage or entitlement. The only reasons doctors are pissed for exclusions in policies is because they know they can’t get paid from anyone else. Hey Doc, how about asking the patient to pay??? The doctor will never do that because an Insurance company has deeper pockets than a patient. Besides, does a doctor really want his patients to know how much he charges (transparency?).
    “Medical necessisty” language has been removed from nearly every policy I have seen since the backlash. Consumers were right, insurance companies were making arbitrary coverage rules based on this vague phrase.
    The conspiracy theorist would love to think of insurance companies gthering together in some “star chamber” scheming how bilk patients. Let me tell you, it just doesn’t happen. The last thing I want to do is sit down with a competitor and openly discuss my internal procedures. Why give them the edge?
    Lastly, I doubt how this article support any meanness on the part of insurance companies. If money is the issue, then we should be equally outraged at the amount hospitals make (don’t believe the garbage about charity care, look at their P&L), pharmaceuticals, and certain physicians.
    Its a vicious, ignorant cycle. Doctors and consumers use the rhetoric of insurance companies wanting to keep the premium dollar. Who do you think pays that premium dollar…you and me. Who do you think gets the bulk of that premium dollar…doctors. And then people dare ask why insurance costs so much??? 🙁

  5. Sorry for the absence, I have been a little busy making sure “margins don’t shrink” next year 🙂
    If any thinks that government doesn’t meddle enough in Insurance affairs they haven’t worked at an insurer recently. The traditional underwriting cycle, where a few good years are followed by a few bad years, has been well documented. However, it has very little to do with cherry-picking.
    In the late 80s and early 90s I would agree that much of the economic success enjoyed by HMOs came from cherry picking low-risk individuals from major med and self-insured plans. But don’t forget HMOs rationed care and effectively had price controls. The latter caused the managed care backlash of the mid to late 90s. Since then, most states have responded with mandated benefits, placed restriction on predatory pricing and selection, and inacted many guarantee issue provisions (HIPAA included). Since the market has been become saturated with managed care plans (even PPOs employed some of the contracting elements used by HMOs). For example, nearly all states require small group to be issued on a guaranteed issue basis. Carriers can not discriminate, deny business. Hence, their is no opportunity for “improved risk selection”.
    Managed companies have backed off of actively managing care because of the backlash of the 90s. Consumer’s were loud and clear, let my doctor make my decision not the insurer. The primary reason for improved margins in the recent past is pricing…pure and simple. And anyone that purchases health insurance directly from companies knows exactly what I am talking about. As cost control measure where chucked in the garbage, companies returned to the one element best able to cover expenses…raise rates. Give the masses what they want and if they want to pay for it, let them. Personally I think it was a dumb move, but economically it worked. The reason why I think it is dumb is because insurance (because of regulation, fear of lawsuits, etc) allowed itself to become a commodity and never really focused on differentiating its products based on value to the patient-consumer.
    As the business model of increasing rates without addressing the underlying costs became a problem (employers complaining too much of 15-20% increase per year) everyone (providers, politicians, insurers, employers)simultaneously agreed that the insureds were not sharing in everyone’s misery…thus, let’s pass on increases to them. So here we are today.
    Now back to the undewriting cycle (my favorite because I have been an underwriter for 10+ years), the reason for shrinking margins in a falling UW cycle has more to do with inflated strategic growth plans than some executive conspiracy. In simple terms, when the profits are coming in mgmt become complacent and is willing to sacrifice some margins for market share. Over time, these decision cause prices to fall below expected trends and profits decrease. Once mgmt figures out their mistake, they tighten up on pricing discpline, enrollment drops and profits go up. I have personally experience this in my career. I have seen this happen in Florida over the past 3 years were insurers have become extremely aggressive in their pricing and sales incentives to expand market share (wall street pressures). This lax and aggressive expansion mentality bleeds over into provider contracting and medical mgmt (not to mention FTE growth). Thus after a few years, medical and SG&A costs far outpaced revenue growth and lo-and-behold the insurers are in a financial crises again.
    So when I hear that Wellpoint continues to make money, my thought is they have pricing discpline and a handle on expected costs trends. Now, having a handle on “expected costs trends” include everything from contracting, to predictive modeling, disease mgmt, and case mgmt.

  6. I don’t thing concentrating power in a few key states will limit the political power of insurance companies. They would still be a huge sector of the national economy unto themselves, embroiled in business relationships all over the country. They might also play politics by setting up outposts in different states.
    Take a look at Bank of America. All real power flows to Charlotte, even when they merger with supposed “equals”. However, they cultivate strategically placed outposts such as Wichita.

  7. Love the thread on this post.
    All of this consolidation makes me wonder one thing: If big insurance companies keep on “merging” and end up stationed in mega-facilities in a few key states, do they lose some political power? i.e. only the senators of those few key states will fight for them?

  8. The biggest “synergy” of any merger is you put a lot of employees on the street who then get 18 months of COBRA and then have to find someone else to provide health insurance. By the way “merger” is the politically correct word used by the acquiring company to keep employees at the “acquired” company in place while they figure out who becomes synergy. When an entire industry goes into a consolidation mode you can put a lot of employees in that category. I wonder how people who have worked for insurance companies feel when they actually have to shop the individual health insurance market. I love to watch a videotape of one them reading the letter that explains the difference between their actual coverage/premiums and what they thought they were buying.

  9. WellPoint CEO: “This action, along with our increased guidance for 2005, signals the confidence the board of directors has in the future of the company and the success the newly merged company is already realizing,” said CEO Larry Glasscock. “During our first full quarter as an integrated company, we were able to deliver outstanding results, which is indicative of how smoothly our integration has gone and just how well our combined company is performing.”
    So, to what actual integration – other than on paper – is he referring?
    As if any of the “synergies” from the merger have been borne out.

  10. So the financial markets are finally starting to echo what those of us buying health insurance already know–laughing all the way to the bank isn’t a sustainable business model indefinitely (although it appears to have been fairly profitable during the last five years).
    Hey JC….it’s not me making this up. Here’s a quote from the referenced article: Mr. France at Banc of America Securities is also gloomy. “The business is going to get more difficult, after five years of expanding margins,” he said. “We think 2006 will be tough.”
    Five years of expanding margins….that kind of suggests that cost increase we insured are paying aren’t just tied to actual costs in health care or a given group. Obviously malpractice has been cutting much into that pie. This article does a great job of underscoring the point I’m trying make. Insurance companies are contributing to our health care problem and they’ve been profiting well from it. Market factors (decreasing enrollment) are finally starting to become noticeable. The bad news is that decreasing enrollment translates to uncovered or underinsured who may be a ticking timebomb for taxpayers if they get seriously ill. I don’t like government regulation any more than anyone else, but if insurers and health care providers can build sustainable business models this is an area the government needs to meddle in.