Aetna (AET), Cigna (CI), Humana (HUM), UnitedHealth Group (UNH) and WellPoint (WLP) have been the talk of the town lately. With the public option and the Medicare buy-in now dead in the Senate these private health insurers are in full recovery mode.
The liberal media is screaming that the insurance mandate without a public option is nothing more than corporate welfare, and the conservative media says we should be free to be uninsured. Both sides insist that our rights are being trampled upon.
I classify myself as a fiscal conservative, but liberal on social issues such as healthcare. I see this split personality being satisfied with the pragmatic politicians in the Senate. The special favors granted to the last few holdouts are not material to fiscal structure of the bill, and abortion concerns seem to weave their way into virtually all social legislation. These are just the costs of doing the people’s business, so don’t sweat it.
Insuring more people will cost the government more money; you cannot sugar coat it. But the question for investors is whether the private insurers will be unjustly enriched or unjustly crippled? I argue that eventually it will hit the middle ground, with the companies adapting to a utility investment profile.
The liberals should not be too concerned that it is unfair to force citizens to buy insurance from profit making companies. The Senate bill requires premium rebates when the medical loss ratio is less than 85% for group plans and 80% for individual plans. States are permitted to legislate even higher ratios. The CBO called the original requirement of a 90% ratio the equivalent of a government nationalization of the industry. So the line between public and private health insurance is blurring.
As the government starts paying out huge subsidies to the private insurers in 2014, both political parties will call for a nonpartisan raise in the medical loss ratio, premium rebates and more taxes to reclaim the private insurers' “excess” profits. A weak public option competitor would be a dream alternative for the private insurers by that time. Today’s conservative ideology will actually harm private insurers in the future.
The medical loss ratios quoted by private insurers are for a mix of business that includes the lower margin Medicare Advantage, so the combined ratios are not useful in judging the impact of the legislation. The government will ensure that the private insurers are financially stable, but restrict profits and executive compensation. They will become wards of the state, safe but unexciting. They should provide returns similar to electric utilities dividends or Fannie (FNM) and Freddie (FRE) bonds.
We are on the path of private health insurers becoming the Fannie and Freddies of the future. Less risky or not, I don’t know. But what is clear is that when the private insurers chose tighter regulation over competition from a weak government option, they made the wrong choice.
The last tidbit is that most people get nothing from the Senate legislation until 2014. Applicants that fail medical underwriting must be without health insurance for 6 months before being admitted to the government funded high-risk pool in year 1. The House legislation has no such requirement. The Senate also limits the size of the high-risk pool whereas the House does not.
President Obama promised a safety net from the start; the Senate is not providing it. This is an area where both political parties might see a need for improvement after the President signs the final bill. The population will demand access to insurance immediately. Private insurers will be vulnerable to ending medical underwriting on individual policies sooner than they think.
Investors should wait to see how the private insurers perform in the new environment before putting their money on the table. It is only those sleuths or psychics that know medical loss ratios of each segment (individual, small group, large group, and Medicare/Medicaid) that can make a reasonable judgment now.
Disclosure: Author is long FNM and FRE.