HEALTH PLANS: Time to cut a deal?

There’s carnage amongst health insurer stocks on Wall Street this morning. For a long while I’ve been saying that the health insurer party was too good to last and in the past year things have certainly cooled down. Hanging over the industry has been an inability to extend itself further into the commercial market (commercial enrollment has been flat over the course of the boom—and now we’re going into a recession) and of course the lingering concern that payments for Medicare enrollment will be cut at some point.

Last night Wellpoint had at least the first shoe drop when it announced that a combination of higher medical costs and lower than expected enrollment would mean that it was going to miss its profit numbers. The stock is off more than 25% and most of the rest of the sector is well off too. Now this wasn’t a huge cut in the numbers—the reduction in forecast profits is under 10%. But Wall Street as you know hates the concept that earnings will diminish, and Wall Street doesn’t understand health care anyway.

Wall Street likes earnings machines that continually increase profits. To be such an earnings machine that you need to be able to sell an increasing number of widgets to the same people, or widgets to new people, or raise the price of the widgets you’re selling to the same people. Health plans can’t really do the first. They have done the second only because of massive subsidies in the Medicare market since 2004 and they look like they’re running out of steam in doing the third—although it’s been a darn good run! (Medical loss ratios are higher on on a base of greater overall revenue than they were 5 & 10 years ago, but that can’t go on for ever and that appears to be where the problem this morning lies).

And of course the political pressure on all the ways health plans make money continues to grow. Those games in the individual market are being found out, the games with opaque pricing are being investigated as consumer fraud, and although they’ve staved off Medicare private payment cuts for now, that issue isn’t going away.

So perhaps it’s time for health plans to consider their potential future as a regulated industry—one that will be forced to compete on issues that actually matter for the good of the health care system and the nation. And perhaps it’s time to prepare to really cut a deal on that, rather than propose a fake plan that takes but doesn’t give.

Now, there’s no way that under such an approach insurers will be allowed to make the kind of profits they’ve seen over the last five years, and of course Wall Street will freak out. But then again, perhaps there’s no time like the present to tell Wall Street the really bad news.


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26 replies »

  1. Wow, how many people have died or lost their coverage just so you could go into detail about how to make money on Wall Street. I’m sure you’re hoping they become the darlings of Wall Street again.
    I believe it’s a moral issue, you obviously see no difference between a widget and a human life. Healthcare should not be a commodity traded on the suffering of human beings. That is why America is not a civilized country.

  2. I have read these entries with great attention…I see the debate remains very superficial, as always. It is true a single payer system will not work for the US, no fear there, there is no wherewithall anywhere in our economy to sustain such a measure, at least while the Baby Boomers are in charge. I also see in the market trends outside of Managed Care Plans and other insurance products.
    It is possible that the market can change rapidly, we are numbed along by the powers that be to believe ER’s are over crowded and managed care plans barely make a profit. We sit back and hear the tale of socialized medicine and the relief it promises. We hear the cry of the uninsured and the people who do not have access…but it is all a farse. The truth is free market philosophies hold the key to success in healthcare reform. Take the advanced medical home model. This is a retail model, it will not adapt well to insurance plans though they are trying. It cannot be paid for on a fee per service basis. It is not measureable on the basis of outcome or cost vs outcome alone, and so we are perplexed by the job of creating this system and/or process by which we can achieve all of the objectives. They contiune to use terms such as “disease managemnt” and “health coaching”. In the retail / hospitality world it is much less complicated, they call it customer service.
    As for the overcrowding of ER’s, that too is a farse, ER’s in many rural hospitals are the only revenue generating portion of the hospital in many cases, this is because of workers comp claims and motor vehicle accidents, can you imagine a retail business that has so much demand that they cry foul and abuse as opposed to adapting to the demand and delivering the goods. Is it really that a lack of insurance drives this demand or the fact thet the ER is the equivelent of wal-mart in the medical world. Open 24/7, has most everything you need, you can walk-in, and to boot they dont require you pay for it right then and there.
    HSA’s would be great if operated by banks and not regulated by the goverment.
    Medical Homes of America starts to sell Healthcare shares at the end of June 08, this allows one to buy “equity” in the healthcare system, purchasing product packages appropriate for them, and as the funds build, building health security for all of us.
    This is one of many measures still to come, we are working on the soloution and will deliver that solution to the market in ’08’
    The goverment does not have an answer, they can only provide opportunity, this they have done. Now it is up to us Americans to take responsibility for our own health, put away the twinkies, or bank away a few shares for each twinkie you eat so you can literlly pay for the consequences.
    Dan Francis, CEO
    Medical Homes of America

  3. I guess the logic goes that disappointing enrollments are due to low premium costs. Nice to have a customer base with bottomless pockets.

  4. Thanks Peter,
    I’m glad we pulled that out of the cooker.
    I will try to toughen up. 🙂
    Onward through the fog.

  5. Scott, I’m actually in a pretty good financial situation with an ability to take care of most health problems, if I get any. I can’t however deduct any of my healthcare costs (too low per AGI) yet employees with health plans get a tax free subsidy, like my wife does. But that’s just one inequity of the system.
    This country creates all income levels which make up the entire economy. We all co-exist for the most part and those that work for less income make life less expensive for those that work for more. But healthcare is the one aspect (other than the legal system) that does not allow everyone to participate at different income levels of choice. By that I mean if you can’t afford to own you rent, if you can’t afford a new car you buy used, if you can’t afford a yacht you buy a canoe. And all that’s fine. But healthcare comes with one price – the high one. The uninsured patients that get treated at your wife’s hospital are a burden, not only on the hospital, which can’t collect, but on insured patients who must pay higher premiums and other costs, as well as on state medicaid. We just won’t be able to get them all jobs with subsidized health benefits. I’ve been on this forum for a while and make no apologies about believing that a government run (with paid government employees) single-pay, universal system is the only way we’re going to get out of this hole. Why, because it will rein in costs and get more people paying at least something toward healthcare no matter their income. That’s what we need to do to provide healthcare to everyone and make it affordable, not free. But I have also said that I don’t believe healthcare will be fixed until we fix our moneyed political system that relies on corporations for donations, and which gives us policy based on legal bribery.
    I welcome your comments and interaction and don’t want to chase you away. You’ll just need to get used to my aggessive writing style that is not meant as a personal attack on character, but only on ideas.

  6. That was a little better.
    Well I have not always has this particular job and I have a pretty diverse history. I do love this country and I think if you actually knew what I did for a living you might change that statement a little. Of course I work for my self and my families posterity. I would be irresponsible if I didn’t. But I did choose a career that allows me to serve my country as well. There are some of us out here that think we got a good thing going in this ol USA. I proudly wave the flag and I have put myself in a position that dieing for my country while not likely, is possible.
    Once again I agree that it’s not a perfect system and I never meant to imply that. It’s not that I don’t think more can be done. But socializing the system seems a little naive to me. I don’t think you said that it would either. You just kind of went on the attack and I was not real sure what your answer to the issue was. You never offered a solution as far as I can ascertain. I would be interested in what you thought a good fix would be. All I was trying to point out is that the economics of the health care system is enormous, and messing around with it has pretty huge implications on many levels. Your own statement implies you do understand my point about people making money.
    Your Quote:
    “And by the way, don’t pull the flag waving “I work for the nation” crap, you work for yourself, for compensation, not for free and not for patriotism”.
    That was my point in a round about way. Thats why most people work, Thats why they get educated, Thats why they position themselves, thats why they innovate! Remove the incentive to improve their life with watered down opportunities you loose the cream of the crop to more lucrative endeavors. Hell we may end up with more Lawyers than we have Doctors and Nurses. Oh, Too late.
    For the record I’m not sure about your tax situation and what you can or cannot deduct. But removing your tax burden is cool by me. I feel you should be given tax benefits for the health care you purchase. I feel you should not be taxed on any funds you utilize for the purchase of a health care system for you or your family. But great care should be given before it’s handed to you as well.
    Peace and good health to you and yours Peter.

  7. Scott, there was no insult intended. But your comments seem based on being in a positon that insulates you from the reality of the marketplace the rest of us have to deal with. We aren’t trying to end poverty or bring about world peace, we’re trying to get control of health costs that are approaching 20% GDP and will affect us all, maybe even you some day. There are many people WORKING out there that can’t cope with the 6% to 10% compounded yearly cost increases in healthcare let alone the devastating financial cost of incurring a serious illness. To simply say that people need to be compensated and use that to explain these rising costs and hardships they bring is to be devoid of the reality. I know government workers work, that was not my point. But at the same time you wanted the private market to work this out, while you are outside the private market. Part of the inequity of this system is individuals who have to purchase there own healthcare but don’t get any tax breaks let alone subsidized premiums. And by the way, don’t pull the flag waving “I work for the nation” crap, you work for yourself, for compensation, not for free and not for

  8. I WORK (Thats right work) for our nation. I earn my benefits. Why do you make it seem like a bad thing? Seems maybe you would like me a little more if I had my hand out and pleaded for you to save me. I post in earnest and you target in on my career? Your too much my friend. I think this attempt at exchanging ideas was a failure and I’m done with this topic and your take.
    Good day sir.

  9. “Well I work for the government”
    Nice to see you have one of those “government” paid for health plans everyone else would like. Scott, I pay for my own healthcare and not with a tax free benefit the rest of us have to pay for.

  10. Peter,
    I agree with you. I think maybe your looking for someone with a polar opposite opinion to discus with but I do not find fault with your points on this subject. I think where we may disagree is the path we might take to a vibrant health care system for every man woman and child. I can only guess that it’s the comment on socialized health care that prompted you to comment on my comment.
    What is it you propose? How do we pay for the treatment for all while still attracting our best and brightest Americans to medical fields? How do you give away insurance to the masses without cutting the legs out from under a multi billion dollar industry without effecting the millions of people that rely on it for their lively hood. How do you continue the cutting edge research and innovation that a free market has always enjoyed.
    Will a government agency make it all better? Well I work for the government and I can tell you from my point of view they can not. We can regulate and implement the platforms developed by private industry but we can not by any stretch of the imagination innovate. My gut feeling on this is that if you socialize the medical industry we may get to a point that most Americans and maybe even all Citizens are covered. By by what kind of system? Maybe a mediocre one.
    I would love to be the one that comes up with the solution to the whole issue but I think it’s way beyond my intellect. We have all been taught that nothing is free. So give universal health care to even the least contributing members of our society then someone must pay. Who? To what extent? Can we carry the burden of taking from the evil rich and handing it to those who are more needy. Where is that line where the rich throw up their collective hands and say what the hell I might as well take from the system as well. where is the breaking point for innovators to not be interested in innovation?
    Free markets innovate!
    Peter, do you work? would you work for free? Do you have pride in the nice things you own? Do you want better? Better House, Car, Schools, Toilet Paper, and yes cures for Cancer, Aids, Herpes and overall better health care?
    I think we both agree that the system isn’t perfect right now. Something should be done to improve it. My co-worker has a father who is dieing of cancer right now. He doesn’t have insurance and he is playing the catch up game on getting medicare. While I sympathize with his plight I also recognize the result is one of his own creation. A life long abdication of doing what a responsible human would do to ensure their security is the result. But the bottom line is even though he never took care of it himself, the system is still caring for him. He hasn’t been turned away. My wife works in a county hospital that is half full of un-insured patients. They are being treated. Who’s paying for that? The poor have always existed and so have the rich. No government in history has been able to eradicate this fact. How do we inspire those without to climb up and earn the benefits of a quality life? Almost as important how to we inspire the rich to continue to push forward.
    How do we find that utopia?
    An yes I look forward to my paychecks as well….no apologies offered.
    Peter, thanks you for taking the time to engage in this discussion. Your comment have given me food for thought and I appreciate your interaction.

  11. Scott, I was interested in your age to see what experience you may have with health issues and the healthcare system. Young people pay far less in premiums and usually don’t get sick, so their perception of the issues is seen through rose colored glasses. It’s also interesting that your employer subsidizes a large portion of your premiums. Does your company also pay for your family members and if so at what cost? Have you always had health insurance? Have you looked to see what an individual policy would cost? Have you seen your premium portion go up and/or had your benefits cut. Do you have an opinion about cost/affordability for those people who work for companies that don’t/can’t pay for insurance? Do you have an opinion about those people with pre-existing conditions who try to find insurance? Do you have an opinion about those people who loose their jobs and now are not covered by company insurance? Did you accept the position with your company partly based on the health plan? At 43 you may not have had to have contact with the health system, but your time will come. We’ll see if your comments and narrow view about, “they all just need to make money” hold up when you need healthcare or if you find yourself in a positon of not having company paid health benefits.

  12. 1. Yes, I’m insured
    2. My employer pay for most of it and I pay a monthly portion.
    3 43
    4. whats your point?

  13. David Moskowitz, grand plans. Just who is going to institute them, the private market? Or are they just going to appear by themselves?

  14. “I have a lot of Canadian friends that would give you a piece of their mind on the subject.”
    Scott, I guess those Canucks won’t mind paying for better healthcare here in the U.S. then.
    Just out of interest Scott, are you insured and if so how do you pay for it and how old are you.

  15. HMOs’ margins have improved in recent years, but they’re still lower than those of S&P 500 companies. And it appears that those margins will shrink if we are in a down cycle in premiums, but I’m not sure that down cycle will last long.
    Price wars are futile exercises and the sooner the insurers come to their senses, the better it will be for their shareholders.
    Not-for-profit HMOs are as profit driven as the investor-owned plans. They just allocate their profits differently. Kaiser, for example, gives its “profits” to its docs and other employees. All plans are profit driven and are affected by the same competitive environment.
    The reason Moskowitz can’t sell his preventive care plan is that health plans don’t provide care, they pay for it. And they won’t pay for care that doesn’t provide short term returns, because enrollees churn. They’d be gone to other plans before an insurer could earn a return on its preventive care investment. If the whole industry offered the same preventive care, all plans would share the risks and rewards, but anti-trust laws prevent such cooperation. And some plans would cheat.
    Medicare won’t play for slightly different reasons. The politicians who would have to raise taxes to pay for the proposed preventive care won’t be around when the payoffs come years from now. Thus they have few incentives to buy into the concept.
    Probably the biggest flaw in the preventive care and outcome reporting scheme, which appeals to all on the surface, is that what incomes do you measure and can they be measured to the satisfaction of payers and patients, not to mention providers? That can of worms has been around so long that we’ve gotten used to the stink.
    Of course, I agree that a single payer plan would fail, but the same people who buy “hope” as a campaign promise believe in the health care fairy tales that Obama and Clinton are telling voters.

  16. Health insurers engage in “pass through” finance. They gain nothing by lowering costs. In fact, they have every incentive to keep them rising, since they can justify raising premiums the next year based on their high costs the year before.
    All their competitors are doing exactly the same thing. Since nobody knows how to prevent disease, nobody has an alternative business model. If the customers don’t like it, they can just go without health insurance.
    Obviously, more and more Americans are choosing that option.
    There is a tremendous business opportunity for a catastrophic hospitalization plan that can actually keep people out of the hospital–not by gate-keeping, like managed care, but by solving disease. In other words, a cheap health plan that delivers preventive molecular medicine could sweep the healthcare market.
    I hate to disappoint single-payer advocates, but I already have proof that this will not come from the public sector. Medicare has its own set of perverse incentives. Perverse, in the sense that costs climb while quality remains poor.
    I found out for myself how perverse all of healthcare is, both public and private sectors, both profit and non-profit, both in the US and abroad, after discovering a way to prevent 90% of kidney failure (1). Dialysis and kidney transplantation cost Medicare at least $25 billion a year.
    No private health insurer had any interest in preventing dialysis, since Medicare paid them handsomely for it ($100K per patient per year). Nor did the non-profits have any interest, such as the National Kidney Foundation; they didn’t want to eliminate their raison d’etre (2).
    In retrospect, I suppose I was naive. I had read Kafka, after all. But I was surprised that Medicare had no interest either. Like everybody else, Medicare bureaucrats don’t want to lose their jobs, especially when the money and the lives spent to keep them aren’t their own.
    The solution to this perverse mess, in which literally everybody employed in healthcare collude unconsciously to fleece patients in the last year of their life, is quite simple, really: force competition on outcomes.
    Step 1: mandate reporting of outcomes.
    Just how many diabetics go on dialysis from health plan A vs. plan B? From doctor A vs. doctor B? Except for the US Renal Data System, which finally began reporting outcomes on dialysis 15 years after Congress authorized Medicare to pay for it, we have no idea about outcomes.
    Step 2: Avoid a single-payer, monolithic system. It is invariably unaccountable. A single player cannot compete with itself.
    Let patients check out outcomes, and then vote freely with their feet.
    If health plans suddenly have to compete on outcomes, then outcomes will get better. Right now, outcomes aren’t even reported. And it shows!
    In healthcare, cheaper is better. The healthier a person is, the less you have to spend on them. It’s currently possible to offer a cheap healthcare plan for $3K a year in total costs, that can actually keep people out of the hospital.
    Such a plan should sweep the uninsured market (at least the roughly 30 million Americans who make more than $30K a year), and eventually the rest of the healthcare market.
    Picking up the poorest 15 million uninsured would be a great argument for public sector involvement. Giving the VA back to the US Public Health Service, whence it came in 1921, could get the job done for very little extra money.
    Perhaps some day even Medicare will embrace preventive molecular medicine, rather than go bankrupt, as it currently appears to want to do.
    The healthcare revolution, from hospital-based, largely futile and infinitely expensive care (it’s medically true that you can’t cheat death), to outpatient, effective preventive molecular medicine, is actually a decade overdue. It would have happened already if various trusted healthcare players had just done their job, such as the VA, a number of academic medical centers, CMS, etc.
    But better late than never.
    Now, if we Baby Boomers just insist on dying at home after age 90, rather than in the hospital, we’ll start really saving healthcare costs.
    1: Moskowitz DW. From pharmacogenomics to improved patient outcomes: angiotensin I-converting enzyme as an example. Diabetes Technol Ther. 2002;4(4):519-32.
    PMID: 12396747. (For PDF file, click on paper #1 at: http://www.genomed.com/index.cfm?action=investor&drill=publications)
    2. Moskowitz, DW. Promoting dialysis alternative. Letter. ACP Observer, Dec. 2006 (http://www.acponline.org/journals/news/dec06/letters.htm)

  17. Donald Johnson,
    I’m not talking margins relative to other industries, I’m talking about current margins relative to historical margins within the managed care industry. clearly this industry goes into cycles of profitability. The margins are not sustainable at these levels, given that at the end of the day, service/product offerings are the same from one insurer to the other… and therefore subject to price competition. The health insurance market is competitive and unlike other industries, non-profits compete as well. also, as it was said earlier, where is the enrollment growth going to come?

  18. Donald Johnson,
    I’m not talking margins relative to other industries, I’m talking about current margins relative to historical margins within the managed care industry. clearly this industry goes into cycles of profitability. The margins are not sustainable at these levels, given that at the end of the day, service/product offerings are the same from one insurer to the other… and therefore subject to price competition. The health insurance market is competitive and unlike other industries, non-profits compete as well. also, as it was said earlier, where is the enrollment growth going to come?

  19. People also seem to forget that health insurance premiums historically have been a very a cyclical industry like many others on Wall Street. I am much more interested to see how the lobbying heavyweight between AARP, AMA vs AHIP will turn out in the next 18 months (because nothing fundamental will happen in a presidental election year).

  20. Great topic and good insight by the author. Bottom line is people need to make money for any endeavor to flourish. Doctors, Nurses, EMT’s, Administrators, Hospital janitors, Insurance companies, medical suppliers, and most important investors. Take away the cash flow and you take away advancement and incentive. Let’s face it the truly altruistic people are monks, priests or politicians (lol). The problem with the system is there are too many people with too many avenues designed to take the money from one person or company and give it to the poor. No wait Robin Hood is not alive today. Who here thinks Michael Moore is just doing what he does for the greater good? He is just another wonk attempting to squeeze a buck out of the system by focusing on what he twists as being injustices. I guess he should be grateful for all the mush filled heads in our university system (and no not just students).
    Outlandish lawsuits are crippling our system. Take the gloves off the providers and I bet we could turn it all around in a snap. Doctors need the ability to doctor and not defend and protect themselves 24/7.
    Oh and before you go off spouting how great socialized health care is in Luxembourg or wherever, just keep the scope of this country in mind. How big are those countries that claim socialized health care works? The size of Rhode Island? I have a lot of Canadian friends that would give you a piece of their mind on the subject.
    Thanks for taking the time to read this.

  21. “It will just take them awhile to raise premiums enough to overcome rising claims costs and disappointing enrollments.”
    I guess the logic goes that disappointing enrollments are due to low premium costs. Nice to have a customer base with bottomless pockets.

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  23. Donald Johnson, you are missing the point. Margins in the health insurance industry have been healthy for years. Given that health insurers basically sell similar services/products, there’s no reason why these margins could be sustained forever, so you should expect some price competition. Margins are also vulnerable in face of a declining interest rate environment. At the end of the day, health insurers thought they had overcome the vicious underwriting cycle, but they are wrong.

  24. Health insurers will get their share of total health care expenditures sooner or later. It will just take them awhile to raise premiums enough to overcome rising claims costs and disappointing enrollments.
    The idea that insurers should or will stop focusing on making money in favor of making the loopy left happy strikes me as ludicrous.
    Check out the Mayo Clinic survey, which shows consumers don’t like the government to be too involved in health care, don’t expect significant reforms over the next 10 years and only 15% are willing to pay higher taxes for reform. Those are the realities.