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Profiting from Health Care Reform (continuing theme, #2)

Unless and until policy makers get back to basics, we will continue to hear the terms "health insurance" and "health care" used interchangeably.  Of course nothing is further from the truth, but the existence of a health insurance industry gives the Government a convenient way to deal with the otherwise fragmented and unruly world of providing health care, especially with respect to giving away or subsidizing care to those whose votes it is courting.  The problem of course is that insurance adds another layer of administration (cost = 15%) and middleman profit (cost = 15%) to the management and total cost of health care. 

So what do they do? First, give the insurers a windfall by adding millions of new policy holders, to gain their support.  Then, when providers have deep pockets to reach into, they raise prices for taking care of the new policy holders, people they had been treating essentially for free under charity and training type programs.  Insurers costs go up, they try to pump up rates, and run right into the next problem.  That is, that the Government promised we could not only cover millions of "uninsured" (in their lingo meaning - erroneously - "untreated"), but also cut the cost of health care at the same time.  So of course the Government will move to stop or limit rate increases.  

Four possible outcomes: (1) Insurers lose, essentially go out of business, Government steps in with a single payer system to save the day; (2) Insurers win, and Government finds some new sleight  of hand to look good, but the end result is inflation; (3) Insurers and Government find a way to look like we have our cake but are still eating it, mainly by limiting access and benefits to the newly insured, and everyone wins except for the newly insured; (4) Government and insurers find a middle ground, and insurers become much like regulated utilities with a managed return on investment.

How to play it depends on the likelihood of any of these possible outcomes. In today's tea party world, options 1 and 2 look unlikely. Option 3 is likely, because it has been used effectively for some time in similar situations.  Option 4 is likely because everyone probably can find a way to live with it.  The top managers of the insurers have already made multimillionaires out of themselves, and their employees are used to a utility mentality.  Either way, profits can be managed to be reliable and unexciting.

For now, play the gyrations generated by the news, because in the final outcome, any decently managed insurer will survive and stay within a predictable range of pricing and profitability.  Talk of rate freezes will present a buying opportunity, while news or rumors of windfalls will offer a selling opportunity.  Just don't hold on too long, bevause this pendulum is swinging wildly, and extreme outcomes are always possible.  These are not income plays yet, and some may well drop out of the race.

Disclosure: No positions