Failure To Control Costs Is Bearish For Insurers

Includes: AET, ANTM, UNH
by: Dana Blankenhorn

Major insurers are failing to control health care costs, which should be seen as a bearish sign for the sector.

A Kaiser Foundation report that health insurance costs for a family of four topped $15,000 this up, up 9% from a year ago, may be seen as bullish in the near term, because it means there is more money to play with.

But the group's prediction that costs will double by 2011, to over $32,000, is simply unsustainable.

What happens when costs rise in this way is that there are fewer buyers, and that has been the case for years. The number of the employed but uninsured has grown. That's why health reform passed in 2010, promising to limit those increases by forcing everyone into the pool.

Employers have been reacting by passing on more costs to employees, raising deductibles, co-pays and the employer's share of policy costs, but this hasn't lowered the health inflation rate. Insurers blame new benefits in the reform law for their increases, like the requirement to cover students through age 25.

While the Administration insists profits in the sector are strong, United Health (UNH) is reporting flat net income Aetna (AET) is only now back to the level it held after a bad Christmas quarter last year, and Wellpoint's (WLP) profits are no better than in 2010 either. For this reason the group is given a relatively low PE multiple, averaging about 12.

Primary care doctors say they are under increasing pressure to deliver more care, but many have still not automated, despite billions in stimulus cash under the HITECH Act meant to push them toward computers. Systems where primary care doctors act as gatekeepers, forcing patients to wait weeks to hear results of basic tests, also drive up costs.

You can't take an unlimited draw from a limited pool of funds. This is true regardless of how you fund health care. But networks which, like Kaiser, both collect insurance funds and pay for care, are doing a better job controlling costs than the traditional insurers.

And this should make investors very wary.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.