by Tony Daltorio, Investment U Research
Monday, May 3, 2010
Last week, I detailed the new healthcare law’s impact on hospitals and pharmaceutical companies.
Now let’s focus on what it does to a different industry: the world of insurance.
Companies operating in that area have to buckle up for some big changes: some good, some bad and some still unclear.
On the plus side – for them – the law requires that millions of healthy young adults have to purchase coverage, whether they like it or not. So that theoretically promises them increased revenue.
But every coin has two sides, and sometimes the flipside doesn’t look nearly as shiny.
This is one of those times.
Effects of the New 2014 Healthcare Law
Beginning in 2014, the healthcare law requires insurers to provide a certain minimum level of benefits for individuals and small firms. Naturally, that costs them more money.
The legislation also allows the government to pay about $200 billion less towards Medicare Advantage plans. But since somebody somewhere has to pay for those costs, the government passed the bill to insurance companies.
In addition, it prohibits companies from denying coverage for unhealthy patients or from putting lifetime caps on chronically ill customers’ payments.
In theory, the young and healthy patients mentioned before should help to balance out the added costs. Because if they don’t purchase a plan, they have to pay a government penalty. But according to the insurance industry, the fine isn’t enough to really make a difference. So many of the happily uninsured will likely take the cheaper route of paying the charge instead.
Even that aside, those who oppose the legislation point to New Jersey, which already forces insurers to accept patients with pre-existing conditions.
That has led to premiums skyrocketing four times higher than other states. And that, in turn, could lead to serious future problems for the industry, as many of its functions – such as assessing risk – change.
And that isn’t the end of insurance companies’ list of reasons not to like the new law and order.
How Insurance Dollars Are Spent
As of next year, the new law requires providers in big markets to put at least 85% of every dollar they make towards pay people’s medical claims.
In short, the law forces them to change how they spend their money. In particular, it makes them pay more for patient services and less for marketing and other practices that the government deems non-essential. If they fail to meet that 85% threshold… well, then they have to pay customers a rebate.
So essentially, they have to comply. Or else.
The amount insurers actually spend on claims is known as the medical loss ratio or MLR. And since the government won’t apply the rules until next year, it hasn’t yet said what expenses can be included in that category and what can’t.
Aetna CEO Ronald Williams says that he and his need to make that distinction very clear.
For example, Aetna employs 7,800 people – a full 23% of its workforce – in its healthcare delivery functions department. Among other tasks, those employees ensure that chronically ill patients understand their condition and keep their appointments.
Yet the government could classify that service as administrative, practically forcing Aetna to downsize the department. And in the end, Williams testifies, “It will actually only increase healthcare costs.”
The 2014 Healthcare Law Makes Life A Guessing Game For Insurance Companies
Karen Pollitz, a healthcare expert at Georgetown University, thinks insurance companies’ MLR will become an important benchmark for efficiency. She also believes that they will have to get creative in order to get that number up.
She says that expenses related to marketing and the middlemen could go first. Those people normally get commissions based on first-year premiums. Meanwhile, Mr. Williams predicts large companies that provide insurance to their employees will lead the way in “innovation to control costs.”
One way or the other, the new law definitely establishes a new framework for the future. Right now, it seems likely that insurance businesses are bound to suffer as that framework get hammered into place.
But as of now, we have yet to see lawmakers unveil it in its entirety. So really, the future for health insurance companies – and the people who invest in them – remains unclear.