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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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Peter HjdNatemarkuJJ Recent comment authors
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Peter H
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Peter H

Nate,
I suggest you read this study before you cite the arguments by right-wing professor Todd Zywicki as gospel:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1425814

Nate
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Nate

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… Read more »

Nate
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Nate

“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.

Nate
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Nate

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… Read more »

jd
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jd

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,… Read more »

Gary Lampman
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Gary Lampman

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… Read more »

jd
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jd

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.

jd
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jd

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.

Gary Lampman
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Gary Lampman

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… Read more »

Nate
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Nate

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.

Gary Lampman
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Gary Lampman

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.… Read more »

Gary Lampman
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Gary Lampman

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… Read more »

Nate
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Nate

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… Read more »

Nate
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Nate

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… Read more »

marku
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marku

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.