Is Insurance Driving Up Healthcare Costs?

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Includes: ANTM, UNH
by: Daniel Jennings

Health insurance drives up the cost of medical procedures. That is the disturbing conclusion from information uncovered by Los Angeles Times columnist David Lazarus.

The cash price for a simple blood test at an LA area hospital was $16, Lazarus reported. The exact same blood test cost a woman and her insurance company $135.48.

The woman and her insurer, the non-profit Blue Shield of California, were billed $677.42 for five basic blood tests, Lazarus's June 10 column indicates. The hospital, Torrance Memorial Medical Center, would have charged the woman $80 had she paid cash without insurance.

The woman would have saved money by paying out of pocket, because her copay was $269.42. Blue Shield paid $408 on top of the copay amount, which accounts for the $677.42 figure.

Insurance Companies may have no Leverage over Healthcare Providers

Lazarus did some investigating and discovered that insurance might be one of the causes of America's high healthcare prices. A discussion with University of Southern California health economist Glenn Melnick was particularly troubling:

"Insurers aren't getting the best prices anymore," Melnick said. "Hospitals often charge whatever they want and have tremendous power over insurance plans."

Melnick's hypothesis is that insurance companies have little or no leverage when negotiating with healthcare providers. He thinks that many of the prices providers quote to insurers are several times the actual costs.

Insurers like Blue Shield often fail to research the true cost of medical procedures which makes it impossible for them to negotiate for a realistic price, Melnick told Lazarus.

"Even at $15," Melnick noted, "it's unlikely the hospital is pricing the blood test below cost."

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Health Insurance May not Be a Value Investment

Investors need to pay attention to Melnick's thesis because, if true, it is a ticking time bomb that could blow the present health insurance system to pieces.

One of the major arguments for health insurance is that it controls costs. Melnick's theorizing and the circumstantial evidence uncovered by Lazarus, disproves that argument.

If this is true companies like Anthem (NYSE:ANTM) are paying far too much for medical procedures. Melnick's theory might be why Anthem's net income has taken a dramatic fall over the last few quarters. Anthem's net income fell by $464 million between June 2015 and March 2016; dropping from $2.862 billion last June to $2.398 billion on March 31, 2016.

Interestingly enough, UnitedHealth Group's (NYSE:UNH) net income barely changed in the same period. It dropped slightly from $6.11 billion to $6.011 billion, between June 2015 and March 2016.

The effect of such pricing on insurance company's financials is hard to determine. Yet this theory certainly calls the contention that health insurance is a value investment into question.

The Ticking Time Bomb that could Destroy Health Insurance as We Know It

What should be of more concern to investors is the capacity of Mr. Melnick's thesis to destroy health insurance as we know it. Casting doubt upon one of the major arguments for private health insurance, its ability to lower costs, is sure to heat up the growing call for single-payer health insurance.

Demands for single-payer health insurance are growing and they are sure to get louder if Lazarus and Melnick's claims get national attention. The sensational nature of this story is sure to catch the interest of many journalists, some of whom may promote it nationwide.

An initiative to create a single-payer health insurance system is on the ballot in Colorado for this fall's presidential election. Hillary Clinton is now promoting the idea of expanding Medicare, the existing federal single-payer health insurance plan, to persons over 50 or 55 years of age. Another popular presidential candidate, US Senator Bernie Sanders (D-Vermont), has made single-payer a centerpiece of his campaign.

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Health Insurance is not Working

The glaring gap between the cash and insurance prices is a potent weapon that single-payer advocates can use against both private and employer issued insurance. Employers, especially those with large payrolls like Wal-Mart Stores, Inc. (NYSE:WMT), can also use this evidence to point to health insurance as wasteful and justify high premiums.

Lazarus's column shows us that the health insurance system is not working as advertised. Instead it seems to be achieving the opposite of what its apologists claim it does.

My prediction is that the debate over healthcare is about to get far louder and more contentious, because one of the key arguments for private health insurance may have been effectively debunked. The argument being that private insurance keeps costs low. If that is not true, there is no reason for private coverage and a powerful argument for single-payer insurance.

If more such studies appear, health insurance is about to be disrupted beyond recognition. Traders looking for companies to short should take notice, because major health insurance companies might soon be in for a major collapse, as their business vanishes in the face of single-payer demands.

Please note: Blue Shield of California is an independent non-profit and not part of Anthem or UnitedHealth.