Private Insurers Respond to Threats of Lost Profit
photo by yomanimus via Flickr
Reed Abelson of the New York Times reported recently about private health insurance companies’ response to the “bleak economy” and Washington’s most recent attempts to make health insurance affordable and available to greater numbers. Large private insurers, such as Aetna, have developed “2,000- page strategic plan[s]” and are meeting “almost every other working day” in response. Private insurance companies are said to be feeling threatened by the Democratic Party’s new found dominance.
The NY Times states:
Almost every business in the country is feeling buffeted by the recession. But for health insurance companies, the bleak economy is only part of the problem: the changing of the guard in Washington is an equal if not more dangerous threat. Together, these forces could deal a body blow to a business model that was already teetering.
The bottom line, of course, is the bottom line. And the fear of the “new guard,” is the fear of lost profit. Although many private insurers have experienced declining enrollment and diminished profits over the course of 2008, two of the country’s largest private insurers, Aetna and United Health, were described by the Times as still being “solidly profitable.” It should also be noted, as we reported in a recent post on this blog, that in 2007 Aetna’s CEO, Ronald A. Williams, received total compensation of $23,045,834 . Despite that lofty number, Aetna managed to record a profit in 2007 of 1.831 Billion.
The NY Times reports:
Both Aetna and UnitedHealth had double-digit declines in earnings last year, but both remain solidly profitable. Aetna earned $1.4 billion, down 24 percent, on sales of $31.6 billion, while UnitedHealth had net earnings of nearly $3 billion, down 36 percent, on revenue of $81.2 billion.
Although profits are declining, attributable in part to rising premiums and customer dissatisfaction in a declining economy, perhaps a greater threat to insurers is present uncertainty. Markets abhor uncertainty. And as the Times states,
As the conversation intensifies in Washington about health care reform, no one knows for sure what role the insurance industry will play in a revamped system.
President Obama, along with the Democratic majorities in Congress, may simply rewrite the rules, forcing insurers to take all comers as customers, including those who previously would have been rejected because of poor health. The government may sharply cut how much it pays insurers to take care of the elderly. And, in what some people say would be a clear step toward a government-run system, there is even discussion about expanding the Medicare program, now limited to the elderly and the disabled, so that anyone could enroll in it.
Although private insurers have made sure to take a seat at the health reform table so as to “influence the debate,” the Times reports that:
Given the current sentiment, the insurers understand that they won’t be able to beat back all efforts at sweeping change, as they did so successfully during the Clinton administration.
That being the case, insurers are forced at this moment to both attempt to shape the legislation under which they will ultimately have to operate (unless H.R. 676 wins out), and effectively guess what that outcome might be so as to craft a business model and make investments in anticipatory response.
This has led to both caution and expansion on the part of insurers– with different insurers placing bets on different segments of the health care industry.
The NY Times reports that
Aetna says it is cautious in choosing to go into new markets. In the case of Medicare, the company says it was careful to enter only those regions where it thought it could still make money even if the government were to significantly cut payments.
Given that, as the Times reports, “In the budget plan released on Thursday, the president said he would cut payments to health insurers in Medicare Advantage by $175 billion over 10 years, through competitive bidding,” Aetna way have wagered well.
The Times reports that United Health’s CEO, Stephen Hemsley, says that
“UnitedHealth has established roots in as many businesses as it can, including some well outside its core health insurance operations, like consulting services to hospitals and doctors. The strategy also involves serving a range of people, whether through Medicaid, Medicare or employers.”
UnitedHealth “is built to be an adaptable business model,” Mr. Hemsley said. As health care evolves, he said, “the most effective business model is one that evolves with it.”
The Times states that “The company’s current emphasis is on increasing its presence in Medicaid, where it expects to add roughly 400,000 new members this year.”
The Times also reported that
In contrast, Aetna is betting more heavily that employers will continue to play a crucial role, providing coverage for a majority of Americans. Unlike much of the rest of the industry, the company is increasing the number of people enrolled in its commercial health plans, expecting this year to add roughly 1.3 million members, largely through its employer business.
It has not been all doom and gloom for private insurers though, as there has been some evidence of government’s willingness to work with them– their presence at the closed door talks of Senator Kennedy, for example, or the fact that under the stimulus bill signed into law last month the government provides for significant subsidies to help more people afford to keep employer-based coverage once they lose their jobs.
But this does not change the fact that we are seemingly in the midst of a paradigm shift in health care finance. And it perhaps behooves us to remember that insurers have a duty to their shareholders to derail, commandeer or co-opt that shift as best they can to maximize profits and minimize damage. That’s just the way it is. And as the debate ensues, and we consider that “sweeping changes” in health care may well result in drastically decreased profits for insurers-especially those who “wager” incorrectly-we may wish to consider that it will be incumbent upon those insurers, as a duty to their shareholders, to make up for that lost profit in some way. And the question then is simply: at who’s expense? And perhaps, who’s care?
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