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Why buy insurers stocks, When the Obama health bill would bankrupt them?

Don Johnson

On Monday, liberals sneered when insurers’ stocks rose, indicating that speculators thought ObamaCare (HR 3590) would be good for the big regional companies. But today several of the stocks are sinking, probably in response to University of Chicago Professor Richard A. Epstein’s op-ed piece in The Wall Street Journal, “Harry Reid turns insurance into a public utility; the health bill creates a massive cash crunch and then bankruptcies for many insurers.”

Here are charts for AET, CI, CVH, HS, HUM, UNH and WLP. Click on a chart for more information. The stocks that are sinking serve the individual and small group markets. Those that are rising are less invested in those markets, I think.

Now, the big companies might benefit from having smaller insurers that serve individuals and small employers bankrupted. But they would be crushed by new regulations and price controls that would not allow them to make profits. Nothing in the bill says insurers should be allowed to earn market returns. That means they’re as likely to go bankrupt as the smaller insurers.

Epstein’s impact graph:

The perils of the Reid bill are made evident in a recent Congressional Budget Office (CBO) report that focused on the bill’s rebate program, which holds that once an insurance company spends more than 10% of its revenues on administrative expenses, its customers are entitled to an indefinite statutory rebate determined by state regulatory authorities subject to oversight by the Secretary of Health and Human Services. Defining these administrative costs is a royal headache, but everyone agrees that they are heaviest in the small group and individual markets, where they typically range between 25% and 30%, without the new regulatory hassles.

Equally important, Epstein writes, the bill would turn insurers into heavily regulated utilities without giving them the right to make market rate returns on investments, which is unconstitutional.

That the bill appears unconstitutional may be good news for insurers, but think of the uncertainty that investors in insurers will face for years as the courts take their time deciding the case.

Who would want to invest in companies that face being put out of business unless the Supreme Court saves them? Who wants to invest in companies that would face cash crunches under the health bill? Who wants to invest in companies that in future years would be forced to comply with even more expensive coverage mandates than those already in the bill?

The bill not only would turn insurers into de facto utilities, it also would make it almost impossible for them to change their business models so they could make money. The government would tell them what to sell, when to sell it and both indirectly and directly at what unprofitable price they should sell their policies.

Some speculators and insurance CEOs may be thinking that they would have plenty of time to fix these problems before major sections of the bill became effective in 2013 or 2014, depending on what comes out of conference. But President Obama will be president for three more years. Even if Republicans improbably regained control of Congress in next year’s elections, Obama would veto a lot of the fixes the industry sought. He thinks profits are bad for everyone but the billionaires who contribute to his campaigns.

For speculators playing the health insurance stocks market, Epstein’s article is worth a studied read and the price of today’s paper.

While the insurers’ stock charts still look bullish, look for them to start showing weakness as investors come to their senses. There is no way the politicians will.

I don’t own these stocks but reserve the right to trade them at any time without notice. For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

Don Johnson blogs at The Business Word Inc. Between 1976 and 1986 he was editor of Modern Healthcare magazine. As its top editor, Don helped buildModern Healthcare, a Crain Communications Inc. publication, into the hospital industry’s leading business magazine and one of the top magazines in the country.

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30 replies »

  1. Some interesting counter points for you Gary;
    “medical debts accounted for only 12 to 13 percent of the total debts among American bankruptcy filers who cited medical debt as one of their reasons for bankruptcy.”
    “Most studies find no medical debt at all in about half of consumer bankruptcy filings and in the overwhelming number of cases where medical debt is listed it is relatively small in amount and unlikely to be a significant contributor to the bankruptcy filing.”
    http://mason.gmu.edu/~tzywick2/Medical%20Bankruptcies%20Testimony%20July%2017%202007.doc
    “In fact, the “finding” in this article of a massive rise in medical bankruptcies appears to actually be a result in the way in which medical bankruptcies are counted, rather than an actual change in the numbers. They draw their data from two sources. First, self-identified bankruptcy filers who say that some medical event “caused” their bankruptcy. Second, analysis of “objective” facts on filers bankruptcy papers that find either (1) debtor or spouse lost at least 2 weeks of work-related income because of illness or injury or (2) uncovered medical bills exceeding $1,000 in 2 years before bankruptcy, or (3) debtors who say they had to mortgage their home to pay medical bills (which for some reason they list as an “objective” factor rather than a self-identified factor.”
    http://volokh.com/posts/1108558247.shtml
    Now that we have some other facts on the table and now that we see how they define serious medical problem and $1000 is major bills lets discuss your 65%. Do you still want to argue your side?

  2. “I.m so confident that I see all and Know all”
    Want to know my secret to being like this, it really is so simple that everyone could do it…
    …I only make statements I know are true or clearly express it as an opinion.
    There are countless things I don’t know, I’m just inteligent enough to not run around claiming I do.

  3. Gary, with a little research you will find the 65% of BK due to medial bills has been blown apart countless times. It was terrible science and designed to get a specific answer to forward a political clause. Off the top of my head some errors where the low level of medical bills required to classify it as due to medical bills. i.e. if someone had 1 million in liabilities and $5000 in medical bills they counted it as caused by medical bills. Obviously the medical bills aren’t what lead to that person’s BK.
    The main causes of BK are divroce and loss of employement, by far more then medical expenses which only become prevolent for those over 50.
    Next is the sampling of BKs to do the study, people trying to blame medcial bills are more likly to air their laundry then those with addictions or mistresses, this leads to excessive extraopolation.
    You repeat this 65% claim but I would bet you have never researched it one bit. The 65% claim agreed with the political point you wanted to get across so you beleive and repeat it. Besides being oft repeated by people sharing your ideology what proof of it do you have? Have you read any of the actual studies supporting this theory? They are junk, no science took place in their writing at all. Post one which you beleive and I’ll gladly tear it apart for you and show you why it is nothing but propoganda.
    Like I have said many times, maybe prior to your arrivial, I have no respect for people that parrot propoganda with no clue what they are talking about. If you want to make a public statement and argue an opinion take the 5 minutes to get your facts strait and know what your argueing. If you just recite the claims of others and put your name behind it you deserve to be embarassed. Not to mention you serve the public no good repeating inaccurate information. My faviorte people to embarras here initially where the liberal idiots insisting 30% of insruance poremium went to profit, ceo salaries and waste and we could just eliminate them and whoosh 30% savings. They read that claim countless times so it must be true.

  4. Gary, like most blogs this one has kind of a community in the comments section. One of my first comments on Ezra Klein’s blog years ago was to rip into the commenter “wisewon” and mock his name, only later learning that he is probably the most consistently meaningful contributor there. Well, Nate isn’t like that. 🙂
    If I remember correctly, Nate runs a TPA or a company that consults primarily in the self-insured part of the market. Something like that.
    My amusement is schadenfreude, I confess. I’ve been hearing the yelling from these two badly misinformed groups for years now, and to see them both hate the bill for diametrically opposed but equally paranoid reasons does release a bit of tension with me, because it kind of brings the absurdity to a head. They’ve got to be feeling some cognitive dissonance as well in seeing this, which might help a few to get a little more realistic.

  5. And that is what? I have not a clue what Nate does.Still I would not want to guess or assume anyone’s stature or position.
    JD; Im glad your amused by various positions and the convictions of all. The Fact is that in all of these conversations. You can find concensus on either side and each have the precieved truth as each individual see’s it.
    I think Nate has some interesting facts. Although, I admit that some of these concepts are beyond my scope of Study. However, it is the tone of the argument that shaters meaningful understanding.
    I have not been involved with Health Blogs Before and probably would not be now. Except for contributing factors of Hospital Acquired MRSA that was a large contributing Factor in my mothers Death in 2007. The cover ups ,lies and deceptive practices have been the driven factor in influencing changes in Health Care and Patient Safety. We have to follow the money and the purveyors that set policy.The principles of accounting and percentages do not do justice for the People who have to die from preventable Staph Infections.

  6. I have to admit that I’m now enjoying the hugely dissonant clash between people on the right (corporate side, not religious) and those on the left (anti-corporate side, not egalitarian).
    The right is now convincing itself that this law will eviscerate insurers and make them go bankrupt, while the left has convinced itself that this law was a huge gift to the insurance companies and was written by them to enhance their enormous profits. Such conviction! At most one of them can be right, but the most plausible conclusion, by far, is that neither is right.

  7. Gary, Nate has a long history here. Most of the regular posters have indicated their field at one time or another, Nate included. He’s an ideological basket case, which clouds what could be some very good analyses of the mechanics of the markets, but at least he hasn’t hid what he does.

  8. Is it Nate or I.m so confident that I see all and Know all. For your information it is not made up and has been quoted as such, on many occasions.Including the News(65% Bankruptcies). Now it sounds as if you are making up your percentages in your Head.
    Nate you come across to me as some Blog Bully that works harder to be argumentative and discreditable than to explain ones self. AS a consumer its obvious that my perception would not be the same as those who work in the Field. So I think it is fitting that you out yourself and explain by what authority you feel that you can blindly attack a position without explaining yourself.
    Even your recent post are vague at best without any frame of referance. You may believe that your pedistal is in lofty places, and you have bullied others in submission. I want you to Know that your nasty attacks will not stop me from contributing to this Blog.
    The purpose of any blog is to have an exchange of Ideas that challenges the Status Quo and attitudes like yours.Consumers have not been directly in this debate for Decades and their are millions more like me! People who are taking charge of their Care and demanding changes in Insurance abuses!
    I’m digging in for a very long battle.Hey, when you decide to come out of the closet and describe your job. Please let us know!However, if you continue to hide behind a fictious name,We understand! Your very special.

  9. Gary your worst then clueless. Medical Bills don’t account for 65% of BK, 50% of BK or even half that. You don’t even know what an anti trust exemption is let alone how it effects insurance.

  10. Donald E. L. Johnson,
    I’m amazed on how thoughtless and selfish that your comments are about paying medical debt.Honestly,have you the financial backing and position to pay all medical bills? If you do;you are fortunate.The Fact that others cannot afford the pay all their Medical debts is not inconceivable. I know of a family that had premature babies and they were submitted with a 1 Million Dollar Bill! Can you afford it! How many years in prison would you apply to the debtor?
    One procedure could net you three to five separate bills, which is expected to be paid immediately. Most work out payments. Like having too many credit cards,each individual payment continues to raise the anti. Even the best of intentions can leave a person short of a obligation.
    Of course, we are not talking about the Basics needed to carry on Human Life. Food, Shelter,utilities, transportation, clothing etc. So if you were given a choice,what would you do?
    Medical Bills account for 65% of all bankruptcies. Its Not because they have a choice,but rather they have run out of options.We expect people to be accountable but the industry is without. Health Industry prices are not posted and has exceptionally enormous rates that can easily drown the Consumer. Even with insurance!

  11. Those who sell Insurance may strongly disagree with comments that I and others have made about its structure. In my view, Health Insurance needs to be slimmed down as much as the Postal Service needs to streamline and reduce benefits.Their is basically no difference between the two because neither has, any competition. One is Government owned and the other is Privately Owned. One is Publicly traded and the other is not.
    The similarities and the absence of Competition has promoted a complacent and a lackadaisical corporate model. Remove the anti-trust waivers on Insurance and watch the house of Cards crumble from their own weight.
    Our jobs have been outsourced and even the customers we service scrutinize every Bill and Negotiate lower prices.Private Industry has looked within cutting jobs and benefits to be competitive. So why does Insurance think they have the right to dictate prices and not be questioned?

  12. How I would circumvent this bill and laugh at the liberas who wrote it all the way to the bank…
    1. Seperate my PPO from the insurance premium and charge a percent of savings or high access fee making it a revenue stream
    2. Billing fees and monthly administrative fees that guarantee profit
    3. Rebates from Pharma and everyone else I could extort
    4. Increase margins on non regualted ancillary coverages
    5. Branch into consulting, charge employers excessive fees for questionable ideas on how to control the now out of control cost increases
    6. BUY KAISER! Congress can always be counted on to be fools, they leave the delivery of care completly unregualted. Hospitals and health systems can take over the insurance business, provide “insurance” for next to no margin but use it to cover up excessive charges.
    This bill, like all liberal healthcare bills, will be a complete failure and will do nothing but worsen the damage they have already done. Liberals don’t posses the inteligence to fix a community park let alone our healthcare system. I just wish I was carrier and could take advantage of this gold mine.

  13. analysis like this is what happens when people that don’t know anything about insurance talk about insurance.
    First it would be very easy to get their margins to 10% and lower.
    1. The cost to process additional claims is pennies for most large insurance companies. The current bill and every thing liberals intend will drastically increase what is covered and paid. Premium will jump 20% annually without question. As premium takes off the carriers fixed cost will drop equally fast. This is already displayed by the liberal fallacy of Medciare being more efficient. As a percentage they are more efficient becuase their claims cost is so high. Once private insurance is as expensive as Medicare the admin fee will drop below 10%. Epstein must have no idea how insurance works today to not know this.
    2. Carve out commissions, billing, and other services, if the group wants them they pay outside the premium. Easily shave 3-6 points. Biggest concern will be state premium tax.
    3. Finally carrier profit is and always has been a percentage of revenue. This bill, as previosuly stated, will drastically increase the cost of insurance. 4% of $7000 is much higher then 4% of $3500. If carriers are bound to make twice as much as they do today then obviously their stock would be expected to increase.
    Some other points liberals aren’t smart enough to grasp, or are evil enough to ignore. One of the reasons Medicare cost so much and loses so much to fraud is they skimp on administration. This is an obvious and known problem by everyone that works in the business, here Democrats are hell bent on repeating the same mistake, how stupid can an entire ideology be?

  14. Don EL Johnson writes:’
    “People declare bankruptcy to avoid paying their medical bills. I think that is wrong. Bankruptcy laws should be changed to keep people from declaring bankruptcy”
    Amazing. What do you suppose someone with a $30K income and $750,000 in bills is supposed to do? (a friend recently had aneurysm surgery and treatment, that was the bill). What do you propose, debtors prisons?
    Your Dickensian outlook is very timely this Christmas Eve. Die, I suppose, and reduce the surplus population.

  15. The loss ratio wording will simply trigger a massive scheme of reclassification of administrative expenses, such as medical management, to the medical expense side for LR calculation. Most companies won’t even blink.

  16. Among the positives, insurance industry gets three years to raise premiums in the name of healthcare reform. It’s perfect alibi.
    After that there is this assurance of fixed customer base and chance to survive. Could it have survived continued attrition of members that would have occured in absence of reform? I doubt it. I think it was on Republican party death spiral course whereby some leave (moderates) making the environment more viral for remaining.

  17. If we care to admit it or not. Health Insurance is a honey hole for investors and providers, at the expense of patients. Investors are flipping to get a piece of the new found cash cows.Some 40 million consumers primed for the slaughter house! Can anyone say it will make Hospitals safer,allow people to live longer and reduce the Costs of services?
    I think it will do nothing for any of these issues. What it does is exploit millions more to benefit Investors in their quest to Harvest profits from denying Services to the sick.(The death panels of Health Insurance.)
    Oh,sure they promised to parse the legal terminology of Pre-existing to only form some other excuse for denying Coverage. Its a win, win for Health Insurance as they still operate without true competition. Individual cost will continue to raise and the investor shall reap the rewards as the quality of Care is drained at our expense.
    The Republican party echos the best message. If your going to Die. Do it quickly and decrease the surface population.

  18. The insurance companies, pharmaceutical companies, and medical care industry wrote these bills. The bills solve the major threats to profitability they are all facing. Enrollment in commercial insurance has significantly declined in the past 30 years. These bills enable 30 million more people to buy insurance with subsidies. The pharmaceutical companies are facing the so-called “patent cliff” and these bills change the rules in their favor on data exclusivity for biologic drugs, in addition at least partially closing the “donut hole.” Overall there is likely no effective cost control so entrepreneurial medical care providers don’t have to give up any profits.
    I’d say “buy.”

  19. Has insurance been anything more than claims processing utility that we need to regret? You may want to regret lost years.

  20. Richard A. Epstein’s original and more detailed argument that the Harry Reid Health Bribery Act of 2010 (my title) is unconstitutional is here:
    http://www.pointoflaw.com/columns/archives/2009/12/impermissible-ratemaking-in-he.php
    The whole act is designed to reduce medical bankruptcies. People declare bankruptcy to avoid paying their medical bills. I think that is wrong. Bankruptcy laws should be changed to keep people from declaring bankruptcy so they don’t have to pay their medical bills. They shift their bills to the rest of us, and that, again, is wrong.

  21. Don – I get your point but it is a little silly to say that their PE should be “0” right now. The final reform bill has been passed yet and 2014 is a ways off.
    I didn’t necessarily understand why so many analysts upgraded a number of the stocks you mentioned this week on Monday though.
    http://www.marketwatch.com/story/us-stock-investors-flock-to-big-health-insurers-2009-12-21?tool=1&dist=bigcharts&symb=UNH&sid=175454
    I would just like to see a bit more on some comparisons to other industries (nursing home industry had some interesting action this week) and actually take a look at some of the technical measures of these stocks.

  22. Is there a provision in the health care bill so a family or individual won’t go into bankruptcy with huge medical bills?
    Thank you

  23. These insurer stocks have been trading at well below their historical P/E ratios for most of the year. Analysts and institutional investors have already baked into the price that this reform bill may have on their downstream revenues.
    I would actually like to see further numbers on these insurers and benchmark comparisons to other segments of the healthcare industry and other industries.

  24. Starting on page 9 of the amendment passed Sunday, the following effective price controls are imposed on insurers:
    21 22 23 24 25
    retary a report concerning the ratio of the incurred loss (or incurred claims) plus the loss adjustment expense (or change in contract reserves) to earned premiums. Such re- port shall include the percentage of total premium rev- enue, after accounting for collections or receipts for risk adjustment and risk corridors and payments of reinsur- ance, that such coverage expends—
    ‘‘(1) on reimbursement for clinical services pro- vided to enrollees under such coverage;
    ‘‘(2) for activities that improve health care quality; and
    ‘‘(3) on all other non-claims costs, including an explanation of the nature of such costs, and exclud- ing Federal and State taxes and licensing or regu- latory fees.
    The Secretary shall make reports received under this sec- tion available to the public on the Internet website of the Department of Health and Human Services.
    ‘‘(b) ENSURING THAT CONSUMERS RECEIVE VALUE FOR THEIR PREMIUM PAYMENTS.—
    ‘‘(1) REQUIREMENT TO PROVIDE VALUE FOR PREMIUM PAYMENTS.—
    ‘‘(A) REQUIREMENT.—Beginning not later than January 1, 2011, a health insurance issuer offering group or individual health insur-
    BAI09R08 S.L.C. 9
    1 ance coverage (including a grandfathered health 2 plan) shall, with respect to each plan year, pro- 3 vide an annual rebate to each enrollee under 4 such coverage, on a pro rata basis, if the ratio 5 of the amount of premium revenue expended by 6 the issuer on costs described in paragraphs (1) 7 and (2) of subsection (a) to the total amount of 8 premium revenue (excluding Federal and State 9 taxes and licensing or regulatory fees and after
    10 accounting for payments or receipts for risk ad- 11 justment, risk corridors, and reinsurance under 12 sections 1341, 1342, and 1343 of the Patient 13 Protection and Affordable Care Act) for the 14 plan year (except as provided in subparagraph 15 (B)(ii)), is less than—
    16 ‘‘(i) with respect to a health insurance 17 issuer offering coverage in the large group 18 market, 85 percent, or such higher per- 19 centage as a State may by regulation de- 20 termine; or
    21 ‘‘(ii) with respect to a health insur- 22 ance issuer offering coverage in the small 23 group market or in the individual market, 24 80 percent, or such higher percentage as a 25 State may by regulation determine, except
    BAI09R08 S.L.C. 10
    1 that the Secretary may adjust such per- 2 centage with respect to a State if the Sec- 3 retary determines that the application of 4 such 80 percent may destabilize the indi- 5 vidual market in such State.
    6 ‘‘(B) REBATE AMOUNT.— 7 ‘‘(i) CALCULATION OF AMOUNT.—The 8 total amount of an annual rebate required 9 under this paragraph shall be in an
    10 amount equal to the product of— 11 ‘‘(I) the amount by which the 12 percentage described in clause (i) or 13 (ii) of subparagraph (A) exceeds the 14 ratio described in such subparagraph; 15 and 16 ‘‘(II) the total amount of pre- 17 mium revenue (excluding Federal and 18 State taxes and licensing or regu- 19 latory fees and after accounting for 20 payments or receipts for risk adjust- 21 ment, risk corridors, and reinsurance 22 under sections 1341, 1342, and 1343 23 of the Patient Protection and Afford- 24 able Care Act) for such plan year.
    BAI09R08 S.L.C. 11
    1 2 3 4 5 6 7 8 9
    10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
    ‘‘(ii) CALCULATION BASED ON AVER- AGE RATIO.—Beginning on January 1, 2014, the determination made under sub- paragraph (A) for the year involved shall be based on the averages of the premiums expended on the costs described in such subparagraph and total premium revenue for each of the previous 3 years for the plan.
    ‘‘(2) CONSIDERATION IN SETTING PERCENT- AGES.—In determining the percentages under para- graph (1), a State shall seek to ensure adequate par- ticipation by health insurance issuers, competition in the health insurance market in the State, and value for consumers so that premiums are used for clinical services and quality improvements.
    ‘‘(3) ENFORCEMENT.—The Secretary shall pro- mulgate regulations for enforcing the provisions of this section and may provide for appropriate pen- alties. ‘‘(c) DEFINITIONS.—Not later than December 31,
    2010, and subject to the certification of the Secretary, the National Association of Insurance Commissioners shall es- tablish uniform definitions of the activities reported under subsection (a) and standardized methodologies for calcu-
    BAI09R08 S.L.C. 12
    1 lating measures of such activities, including definitions of 2 which activities, and in what regard such activities, con- 3 stitute activities described in subsection (a)(2). Such 4 methodologies shall be designed to take into account the 5 special circumstances of smaller plans, different types of 6 plans, and newer plans.
    7 ‘‘(d) ADJUSTMENTS.—The Secretary may adjust the 8 rates described in subsection (b) if the Secretary deter- 9 mines appropriate on account of the volatility of the indi-
    10 vidual market due to the establishment of State Ex- 11 changes.

  25. Taken out of context many things appear to be more ominous than they really are. Insurance is : A wager system where by the insured is betting they will be far worse off than the cost of their premiums and the insurer is betting the alternative. When you allow the insurer to set the rules of use against the insured without a common solution by the BIG insurers, YOU STACK THE DECK AGAINST THE INSURED.
    The bill passed doesn’t establish premium regulation, that was a lie. The bill will require the broken Insurance Departments of MOST states to do the JOB they should be doing, regulating the value cost impact of the insurance provided, not just determining if the insurance company’s profit margin is able to meet state standards, which is WHAT they do today.

  26. I don’t recall anyone saying that premiums would be regulated under the bill. Am I mistaken?

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