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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