Uncle Sam Wants You To Pay More For Healthcare
Health insurance agencies have profited handsomely from the Affordable Care Act. For example, Optima Health, the only insurer on the Virginia exchange in 2018, posted record profits after tripling individual marketplace premiums. Indeed, the new legislation has helped some struggling insurers move back into the black. According to The Council of Economic Advisors, premiums have risen much more sharply than claims costs since introduction of the ACA.
A quote from the same study indicates that subsidies are being covered by the government (e.g., you and me) while the insurance companies made more profits from their premium increases.
Gross profit margins (premiums less claims) have increased as the small number of remaining companies gained experience with the individual and small group market risk pool and set higher premiums while government subsidies cover most of the rising insurance costs on the exchanges. The fact that low-income individuals are enrolling at high rates, while at the same time premiums are rising dramatically, is a clear sign of a distorted market that involves larger transfers from taxpayers to insurers.
In addition, the study notes that while many insurers left the individual market due to losses in state and federal markets, their net income increased substantially from 8.7 to 19.6% between 2017 and 2018, largely due to increases in Medicaid enrollment and tax reform. The result is that health insurer’s stock prices doubled from the inception of the ACA in 2014 though 2018. Here is a comparison of the Big 8 healthcare insurer net incomes between 2017 and 2018.
Source: Fierce Healthcare
What Elements Most Drive Premiums?
An examination of health care costs provided by Edmund Hailsmaier and Doug Badger at the Heritage Foundation provides insight into what caused healthcare premiums to rise so much since 2014 when the ACA was put into effect. They came up with these direct causes.
- Taxes and Fees
- Essential Health Benefits
- Preventative Services Requirement
- Minimum Actuarial Value Requirements
The paper also noted several changes that had the effect of redistributing costs among the participants, often making insurance more expensive for those receiving less of the actual benefits. The net effect was to subsidize insurance costs by those who use the most from those who do not.
- Prohibition on rating by sex
- Age Rating Compression
There are also rules that increased the selection effects, which substantially changed the behavior of those applying for insurance under the new ACA rules.
- Shift of high-risk pool enrollees into the individual market
- Shift from continuation coverage (move from COBRA-type program to the individual exchange subsidized market)
- Migration away from early retiree coverage (provided by employers)
- Enrollment gaming
A study by Milliman, an actuarial services firm, provided in 2013 a prospective assessment of potential premium increases through the plan.
Source: Heritage Foundation
Post enactment of the ACA, global consulting firm McKinsey and Company did their own study for 2017 across Ohio, Georgia, Pennsylvania, and Tennessee focused on 40 year old males, using Silver plan premiums. Here is a chart of their findings on premium prices.
Source: Heritage Foundation
The actual premium increases for this group of insured shows much higher rates than indicated in the prospective actuarial study provided by Milliman prior to the enactment of the ACA laws on the marketplace.
Stock Explosion for Biggest Health Insurers
The ACA was a nice setup for the insurance companies: reduce competition and raise premiums while the government largely picks up the costs. The tax reform that has benefited the corporate sector was merely the cherry on top of a very generous profit sundae for the insurers.
I will briefly review the stock charts for the top 3 public health insurers to illustrate the point, but readers are encouraged to study the players further, especially if considering making any investment decisions in this space. Here is a handy top eight public health insurer chart for you.
United Healthcare is the largest health insurance provider, more than tripling its market price since the ACA came into effect. Oh, and net income has gone up over 131% during the same time frame.
Source: Seeking Alpha
Let’s take a gander at Anthem, which includes former Wellpoint, which in itself was the rebranded California Blue Cross that used to operate at a loss. The companies merged to form Anthem in 2004. Anthem’s price has multiplied by over 3.5x its value since the ACA came into effect in 2014. Anthem’s net income has risen a (relatively) modest 58% in that same time frame.
Source: Seeking Alpha
Aetna, now part of CVS Health, had tripled in price by the time they were bought. It is no wonder CVS wanted them. Just taking 3 quarters of 2018 into account, Aetna had increased its net income from an annual average of $2.1 billion to $3.4 billion. That’s a 62% rise in profits, while ignoring income completely from the 4th quarter of the year! Those types of returns are sure to put a smile on the faces of investors and company executives alike.
Appeals Court Considers Removing Individual Mandate
An appeals court earlier this month hinted that it may strike down the individual mandate as unconstitutional, but also instructed that a decision may not be coming for several months. When the 2017 GOP tax law eliminated the penalty associated with the mandate, attorneys for a coalition of Democratic states argued they did not intend to abolish the mandate itself. But without the penalty, which the Supreme Court ruled a tax in 2012, Republican attorneys question why having the mandate makes sense in the first place. If the mandate is removed, it is likely that most of the effects of the ACA would have been made null and void, a point Democratic attorneys are keen to acknowledge.
In December, a Texas District court ruled the entire law invalid which shocked lawyers. The current debate regards whether lawmakers knew removing the tax penalty would eventually unravel the rest of the law. Experts are split on the ultimate outcome expected, with those in favor saying they did not see the Appeals court disagreeing much with the arguments. Though, the courts tend to absorb all arguments and make decisions on the balance of what they consider key points in law.
Everyone expects that coverage for pre-existing conditions would be maintained, whether by the court or through additional proposed legislation. Costs for covering pre-existing conditions make up a substantial part of the rise in healthcare costs, as noted in the studies above. Regardless of the outcome, Americans should not expect a complete rollback of the healthcare prices they now pay to pre-Obamacare levels.
Outlook for Health Care Stocks?
If you invest in healthcare, you should be paying close attention to the pending decision. If the mandate is removed in addition to the tax penalty, then it would fundamentally change the insurance exchange system by removing some built-in profit makers for the insurers. More than likely, competition would come back to most of the states, and drive premium prices down closer to pre-ACA levels. An add-on affect may be reduction in Medicare enrollment as well as migration from government subsidized plans back to employer continuation and early retiree alternatives. The taxpayer subsidy that insurers have generously benefited from since 2014 would also likely be reduced unless new legislation affirms at least some funding for pre-existing conditions using public funds.
Whatever the decision by the court, it is likely that profits for health insurers won’t continue on the same upward trajectory as the last 5 years. Insurers have already conveyed to AM Best, a global ratings agency, that they expect eventual cost headwinds to kick in while Medicare prices continue to trend lower in line with existing government-funded programs. The outlook for many health insurance providers is likely somewhat bearish, with the court ruling potentially kicking over a major tent pole holding up current health care insurance profits. Some caution is warranted for the remainder of 2019 and into the first half of 2020.