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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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MGMatthew HoltG. Leo DuMoucheljdgjudd Recent comment authors
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Matthew Holt
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MG is dead right. My HSA holder pays me about $4 a month in interest and charges me $2.50 in fees. (Too lazy to move it, but I should)

MG
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MG

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… Read more »

Matthew Holt
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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… Read more »

G. Leo DuMouchel
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G. Leo DuMouchel

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… Read more »

jd
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jd

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… Read more »

gjudd
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gjudd

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.