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POLICY: Communism breaks out on Wall Street? (No not really)

I sat through a very interesting talk about American health care yesterday afternoon. I guess I knew all this but it was good to have it laid out in front of me. Here are my notes from the talk about the health insurance market.

The overall number of people with private health insurance has been stagnant (176.9m) since 2000 while the workforce is growing (from 137m in 2000 to 145m in 2006). The number of uninsured is growing as are those in public programs. And as a consequence the “lives” growth in the big for-profit health plans has been below Wall Street expectations. Consumer directed health plans are growing and from around 9–10m lives in 2007 may end up at as many as 25m lives in 2010 (although those projections are much lower than they were a year ago).

Margins are as high as they’ve ever been and are at the top or even higher than the top of the underwriting cycle. Is the underwriting cycle over as they’re saying? Maybe but it’s been around for 50 years, and margins in non-profit Blues (which the speaker said aren’t so concerned about profits as the for-profits, which may be news to some non-profit CEOs I’ve met!) have started to trend down, and overall premium trend is moving down. Furthermore, some competition between plans is causing overall pricing go down (although some of that may be change in product mix, as more HDHPs which have lower premiums are sold).

Then there was a great chart showing that usually medical cost trend goes up with a 3–4 year lag to overall economic growth. We’re at about 3–4 years after the start of the most recent economic expansion now. So should we expect medical trend to go up, while premiums are going (relatively) down, and so in consequence expect the financial health of insurers to be getting worse? (My note: Is that why they’re trying so hard to hang on to those “extra” Medicare Advantage payments?)

Finally, we’re seeing employer’s provision of coverage to their employees go down, unusually, in the middle of a boom (the jobless recovery is not jobless, so much as benefit-less).

What did the speaker think was the likely outcome of all this? Bad news for health plans compounded by national health reform starting in 2009 lead by a Democratic President.

And from which lefty did I crib all this insight? Matt Borsch, health care analyst at that well known group of Bolsheviks called Goldman Sachs.

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  1. In general, CDHPs mean less risk for a health insurer but also less potential profitability per CDHP enrollee. Health insurers that are good at containing the medical loss ratio actually get hurt by having a higher number of CDHP enrollees vs. traditional plan enrollees.
    Plus, when talking about CDHPs you have to differentiate between HRAs and HSAs. Two completely different products and clientale. HRA covered lives are almost exclusively in the national accounts at health insurers. Large employers still prefer HRAs over HSAs for two reasons: benefit design flexibility and control over the dollars. HRAs are generally a pain in the ass for insurers because mean slightly less premium dollars than a tradtional PPO plan and potentially larger administrative costs due to the tweaking of the benefit designs of the HRAs.
    HSAs have predominantly been picked up by individuals (1.11 million) and the small-group market (1.06 million) but according to the recent AHIP numbers from enrollment in the large-group market (2.04 million) is finally picking up. Health insurers make scant margins on the premium revenues for HSA plans but the real play though with HSA accounts is who is the custodian for the HSA account.
    UnitedHealth figured this out pretty out early and bought Exante Bank in Utah. United has been pretty aggressive about pushing their employers with HSA-linked plans to open HSA accounts at Exante instead of at Wells Fargo or JP Morgan Chase.
    Right now Exante Bank has roughly 250,000-300,000 HSA accounts with about $300 million in deposits. Peanuts in the banking world but can you imagine if HSA accouts actually take off (insert skepticism here)? Not only does Exante Bank make a monthly admin. fee off each account but they are getting a piece of the transactions business too. Exante is also positioning themselves to make additional revenues through financial services and investment management as account holder begin to investment in mutual funds, bonds, etc. Additionally, Exante is making a nice spread on the investment returns vs. the interest they are paying out.

  2. gJudd. When the Goldman Sachs team got together to prognosticate on the future of American health care they predicted a national health care reform bill lead by a Democrat passing in 2009.
    There is no room in that program for the kind of excess seen from health insurers in the last 5 years.
    The Bolshevism joke reflects that GS has no axe to grind, and in fact does better with a very profitable health care insurance industry. They just don’t think there’s going to be one in the medium term future.
    As Leo points out, things are very good financially for insurers now, and probably wont be for long.

  3. Operating margins for health plan administration (TPA services)is 20%, but administration is less than 10% of health plan costs for self insured plans. The managed care companies thus earn roughly 2% of the self-insured health plans costs. Operating margins on insured plans is currently 9 to 12 % depending on the company. In past cycles, operating margins ranged from -2% to 7%.
    CDHP is simply a way for the managed care companies to offer an affordable product to small and mid sized companies who would otherwise drop insurance entirely. Recognizing little growth in the employer market, the companies do not compete on price. They try to compete with bells and whistles–wellness programs, disease management, flexible HRA administration, etc. They are still trying to build margins.
    The only price competition occurs in state with strong non profits and regulators who are pressuring the non profits about the large size of their reserves (accumulated surpluses). This has caused aggregate margins to level off or decline slightly. However, in state without non profits, renewal premiums are still increasing in the 15% range, despite 8% medical costs increases. Actual increases are lower due to buy downs in benefits.

  4. There is definitely some confusion here, though whether it is mine or Matt’s remains to be seen.
    Margins are as high as they’ve ever been and are at the top or even higher than the top of the underwriting cycle. Is the underwriting cycle over as they’re saying? Maybe but it’s been around for 50 years,
    There is no such thing as being higher than the top of the underwriting cycle…whatever the highest value is becomes the top of that particular cycle. Or did you mean to refer to some historical value based on past cycles? FYI, the data I’ve seen indicates that there is still an underwriting cycle, but that with several recent changes in the industry it is lengthening and flattening (I think another way to say this is that the period is increasing and the amplitude is decreasing, though with a higher mean value).
    …margins in non-profit Blues (which the speaker said aren’t so concerned about profits as the for-profits, which may be news to some non-profit CEOs I’ve met!) have started to trend down…
    I think the distinction we need to make here is between concern to make a profit vs. concern to maximize a profit. All non-profit insurers are very focused on having revenues exceed expenditures, but few aim to maximize net income. On the other hand, this is exactly what the publicly-traded insurers try to do.
    …overall premium trend is moving down. Furthermore, some competition between plans is causing overall pricing go down (although some of that may be change in product mix, as more HDHPs which have lower premiums are sold).
    HDHPs are having a very modest effect on premiums. Partly this is because they are still a very small part of the total insured, and partly it is because roughly half of all HDHPs are offered by self-insuring companies. That means that no insurance companies are competing on premium for this business, only competing for administrative fees.
    By the way, this is why CIGNA in particular has become so gung-ho about CDHP: about 80% of their enrollment is in self-insured accounts, and they don’t get any drop in revenue when a self-insured account switches from rich benefit to CDHP, and perhaps they even see an increase. I think that this is a more significant motivator for the nationals and blues to promote CDHP than is underwriting margins. I mean, who cares if your underwriting margin goes from 5% to 6% or even 10% if your underwriting revenue drops 10% or more, which is roughly what happens with CDHP. If someone has more insight into CDHP strategy, I’d be happy to hear it.

  5. Matthew, I’m having trouble getting from your selective transcription of Borsch’s remarks to your portentous allusions to communism, bolshevism, and what-have-you.
    How do fairly conventional observations about dimming 3-year financial prospects for health insurers translate to insinuations about the (politically excavated?) ‘burial’ of the industry?
    Perhaps you or others can fill in a few of the blanks.

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