It’s not been too pretty a picture for America’s health insurers lately. Sure they’re still turning decent profits, but for the past two years their stocks have barely been matching the S&P 500 Index. What went wrong? Well, you can blame Wall Street. The Street is concerned with two things. Money now and money later.
Since 2001 the big health plans have managed to increase the percentage they keep of fast-growing health care premiums (which have been going up at 3 to 4 times the rate of inflation), a number known to stock analysts as the ‘Medical Loss Ratio’ (MLR). It used to be that for most big insurers roughly 82-87% of premiums went out the door to pay for actual doctors, hospitals, drugs et al. Now the MLR is generally below 80%, and in some cases below 75% meaning less money’s out the door and more is on the bottom line of the health plans.
But the health insurer party that’s been going on for most of this decade may be coming to an end. But perhaps being busted by the cops and being told to tidy the house might be the best thing that ever happened to the insurers. Let me explain.
Wall Street is demanding. It expects continued growth in profits at health plans. So either the MLR must continue to go down or premiums must keep going up. But higher premiums makes customers grumpy and less likely to buy insurance. And lower MLRs makes doctors and hospitals grumpier and less likely to honor insurers. So insurers have had to find new paying customers to keep growing their businesses.
They didn’t have to go far. The U.S. government, in particular the Medicare program, stepped up to the plate. In three years, from late 2003 to mid 2007, Medicare enrollment in private health plans has almost doubled, going from about 11 percent to a eye-popping 18 percent of the number of folks eligible for Medicare, according to the Congressional Budget Office. How’d this happen?
This wasn’t exactly new. Private insurers had profitably provided services to Medicare recipients in the 1990s but after a while government accountants noticed that insurers were lowering their costs by recruiting healthier than average seniors and avoiding the sickos. They were being paid an amount per recruit that reflected the average cost per Medicare beneficiary which made recruiting healthy seniors very profitable – averages being, well, averages and the plans working had to bring in folks who were above average health. That ended up costing the government lots of money because more of the sicker, more expensive seniors were left behind in the taxpayer-funded Medicare program.
So in the late 1990s, because we wanted to balance the Federal budget, payments to private insurers got cut. Insurers ran from that market really fast.
Luckily for them, at the same time as health costs went up in the early 2000’s and they started making money again, they got another bonus: The 2003 Medicare prescription drug bill which raised Medicare payments to health insurers. The good times were back! Soon it was clear that history was repeating itself and that insurers were being paid more than average to recruit healthier than average seniors. In fact the commonly accepted estimate is that they’re getting about 12 per cent more than it costs traditional Medicare to look after the same kind of senior!
Of course, Wall Street’s loving it but remains worried that, as with the 1990’s, wiser fiscal heads may prevail and that the Democrats in charge of Congress will shut down the Medicare party.
It doesn’t help that insurers have been nakedly demonstrating their lack of good sense and their greed. Several of the health plans have been busted by the agency that oversees them, the Center for Medicare and Medicaid Services (CMS), fraudulently marketing their Medicare with tricks that would make a card-sharp blush: Allegedly telling seniors there were no premiums when there were, telling them that they didn’t need to change doctors when they did, and saying that various procedures which Medicare covered were also covered under these plans when they weren’t. It’s no wonder business was good. Too good.
Now Congress – no longer controlled by the Republicans who gave us the prescription drug bonanza – is starting to get involved. Last week a report from GAO slammed CMS’ management of the Medicare Advantage program. There’s the strong possibility that the bad behavior of the private insurers is going to meet an aggressive Democratic Congress and White House in the coming years. That would mean either private plans being kicked out of Medicare and Medicaid or, more likely, the amount they get paid to enroll members in those programs will be cut.
That would actually be a good thing for those plans – even amongst those few on Wall Street who believe in the long-term. If plan providers could figure out how to manage their members, and deliver them better care for the same amount of money than it costs the government to do it directly they’d assure themselves a place in the health care system in the future. So there’d be money today and money tomorrow.
But as it now appears neither Wall Street nor many others think that they can get there from here. Which is a pity, because we need to generate innovation in the management of our health care system from somewhere. In the meantime, let’s hope that for the sake of their own self-preservation, smart people within the big insurers can think beyond next quarter’s revenue.