How Health Insurers Are Defusing The ObamaCare Bomb

| About: iShares U.S. (IHF)

Rick Ungar of Forbes says there is a bomb inside ObamaCare and it's about to go off. The bomb is a requirement that insurers pay out 80 cents on every dollar they take in the form of benefits. Ungar says this can't be done while maintaining profitability.

But insurers are already busy defusing this bomb. They are doing it by buying into Medicare.

Over the last several months, as I have been chronicling here, health insurers have been falling all over themselves buying companies that specialize in treating Medicare patients. United Healthcare even bought one that specializes in patients with chronic conditions.

Why? Because these acquisition targets have a “secret sauce” for delivering care at a profit. They control their costs by owning facilities. And they control their patients through regular check-ups, through wellness care.

This is possible because Medicare features a set fee per-patient. That's the business model. It's not fee for-service, it's fee per-patient. When a Medicare company like, say, Care Improvement Plus, gets people to come in regularly, when it monitors them closely, they are much less-likely to go into the hospital. Curiously enough, this also delivers higher levels of customer satisfaction than the fee for-service model. Patients develop a relationship to their care givers, and trust them.

By adding additional paid-for services into this, through Medicare Advantage plans, as Humana (NYSE:HUM) did in buying HealthSpring, you get yet-another benefit. Now you have customers who are loyal to you, who are giving you regular cash flow, and when needed you simply increase the cash flow.

Ungar worries that regulations defining what is or is not care for purposes of grading insurers is a big problem, but that's inside baseball. Insurers know how to play inside baseball. They know how to manipulate even well-meaning regulators, using political bullying when necessary, and squeeze out loopholes they can drive a profitable truck through.

Better yet, as they acquire new facilities through provisioning of Medicare, as they learn go combine public and private funding sources through Medicare Advantage, they also develop models they can use to expand into the general market.

Doctors don't know this but before too long they're all going to be working directly for health insurers. And with firm control over both the income and outgo side of the health care equation, insurers think they can become more profitable than ever.

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