Health Insurance Companies Part I: The Game Is Ending

Includes: AET, ANTM, CI, HUM, UNH
by: Carl Dincesen

Health insurance company equity looks cheap. The coast looks clear for the continuation of good real earnings growth on top of the big but one time gain to come from mandated coverage.

But, any business that is allowed to game the system eventually exhausts or loses that edge. Healthcare’s edge was huge. Reformists who can’t figure out that the way states “regulate” or don’t regulate health insurance companies is the root of all the ills they see, have not diminished it.

For health insurers it is ending by exhaustion. They have or will soon reach the point where more spending cannot be supported by higher insurance prices or more simply, prices have reached what the market will bear, sans competition, for an essential service.

The current regulatory structure that I call “profit margin regulation,” is a simple yet ingenious con that promotes waste and inefficiency by tying insurance profits to how much is spent, the more the better. A great system except, when spending growth stops or slows down; profit or earnings follow suit down.

If you believe insurers can get total healthcare spending well above 20% of GDP from today’s 17%, then read no further, and buy health insurance company equities. Note though, that nearly a 20% level is already in the bag because of the new universal coverage law.

This assumes no premium rate (price) increases based solely on insuring more people, which is unlikely. Most of the earnings growth during the past fifteen years has come from increasing existing policy utilization, not new customers.

Consider too that a number of provider organizations have expressed a clear willingness to accept lower reimbursement rates. What they want in return is the elimination of reimbursement rules that promote non-productive spending or penalize efficiency. I can think of no better example of how acute this makes today’s reality.

As if the GDP number comparisons alone were not enough to see the size of the U.S. healthcare price bubble. It will not burst because it is an essential service but from this point of view, earning growth looks vulnerable.

I would seriously question earnings growth forecasts beyond 2013. After that, in my view, they will not be able to grow earnings at anything like the rates they had for the last 20 years.

It does not help that state-based “profit margin regulation” grants the private sector control over what the government pays providers to care for people covered by Medicare. That assumes the government wants to keep acceptance by providers at the current widely accepted level.

Government (federal and state together) now pays the largest share of the $2.5 trillion annual cost of U.S. healthcare. It is allowing itself to be plundered by its own private sector. That is not a platform on which long-term earnings growth can be sustained. Today, I think insurers would agree and are not sure know what to do.

Guidance Part II – How to Guarantee a Decade of Superlative Earnings Growth

(To come)

Disclosure: No position