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  • Healthcare Reform and Insurance Companies 0 comments
    Apr 30, 2010 3:39 PM | about stocks: ANTM, AET
    Of all the industries facing upheavals following the passage of the healthcare reform bill, none is in for more change than the insurance industry.
     
    Insurers will have the luxury of covering millions of healthy young adults who will be forced to buy their products. However, the companies are grappling with rules that will dictate how much of every dollar they must spend on medical costs.
     
    Effects of the New Law
     
    The legislation requires that insurers provide a certain minimum level of benefits in the health insurance exchanges that individuals and small firms must use to buy coverage, beginning in 2014.
     
    Some of the changes that the legislation requires will have a negative effect on insurers' profits. First, there is a reduction in government payments to Medicare Advantage plans of about $200 billion.
     
    And by 2014, companies that weed out unhealthy patients and put lifetime caps on payments to customers who were chronically ill will be prohibited from doing so.
     
    On the plus side, young and healthy patients will receive a tax penalty if they do not buy insurance. This will help to balance out the cost of the sick for insurance companies.
     
    However, insurance companies contend that the penalties are not stiff enough...that healthy people will still opt to not buy insurance.
     
    The new healthcare law will create a new national standard for Medicaid eligibility, eliminating disparities. For instance, a family of four in Texas making $16,000 a year was not eligible for Medicaid, but a similar family in Minnesota was eligible.
     
    The new law will mean that many more patients walking through hospital companies' doors will have Medicaid coverage. This will mean higher profits for companies involved in that sector of health insurance.
     
    There are also questions about the companies’ long-term prospects given that many of the functions they serve today, such as assessing risk, will fundamentally change over the years.
     
    And there is something else which concerns the insurance companies...
     
    How Insurance Dollars Are Spent
     
    There is a provision in the new law that requires providers in big markets to spend 85 percent or more of every dollar they make paying people's medical claims.
     
    In short, the law will force insurers to shift how they spend their money. Insurers will be forced to pay more for patient services and less for marketing and other practices the government sees as non-essential.
     
    If insurance companies fail to meet the 85 percent threshold, they will be forced to pay customers a rebate!
     
    The amount insurers actually spend on claims is known as the medical loss ratio or MLR. For the first time ever, the MLR will now be known to the public. Supporters of the recent legislation say this is good – it will put more money into “actual care” instead of advertising, profits or bonus.
     
    At the moment, no one is sure what expenses will be allowed by the government to be included in the MLR. The new rules are set to be implemented next year.
     
    The CEO of Aetna (NYSE: AET), Ronald Williams, says insurers need to convince the government that certain expenses do deal with quality care, even though they appear to be administrative.
     
    Aetna employs 7,800 people, 23 percent of its workforce, in “healthcare delivery functions.” One example of such functions is ensuring that patients with chronic illnesses understand their condition and keep their appointments.
     
    If the government moves to classify those services as administrative costs, they are likely to be cut back. Mr. Williams says, “If we are to reduce that, it will actually only increase healthcare costs.”
     
    The simple truth is that the new law simply established a framework for the future. The regulations, institutions and mechanisms that will determine how it functions have yet to be created or put into effect.
     
    So the future for many health insurance companies and investors in those companies is still rather unclear.
     
    AmeriGroup
     
    Investors looking to invest into a health insurance company need to look for a company that is less affected by MLR and other changes and that may actually benefit from the new healthcare legislation.
     
    One such company is AmeriGroup (NYSE: AGP), which is a multi-state managed healthcare company. Even though the company recently joined the ranks of the Fortune 500, it is still considered a small-cap company with a market capitalization of only $1.8 billion.
     
    The company works with state governments to provide Medicaid benefits to the elderly and children. AmeriGroup's focus is in sharp contrast to large insurers like Aetna, who do a lot of business with corporate America.
     
    AmeriGroup's offerings include Medicaid expansion programs and the Children's Health Insurance Program (CHIP) in states. CHIP provides coverage for those under the age of 19 who do not have health insurance.
     
    The company will be a major beneficiary of the healthcare legislation, setting a new national standard for Medicaid eligibility. Estimates are that this will bring more than a 30 percent increase in the expansion of the Medicaid population in the next four years.
     
    AmeriGroup will also benefit in the near term from state budget problems. Budget problems are causing further shifts to managed care in Medicaid's programs for the elderly, blind and disabled. 
     
    The company's most recent earnings report shows that AmeriGroup is doing well. It posted a quarterly profit that handily beat market estimates, helped by strong growth in premium revenues and continued membership increases across most of its markets.


    Disclosure: No positions
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