Health Insurers and the Wages of Deferred Maintenance

Nov. 01, 2011 10:24 AM ETHUM, AET, AAPL
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Long-Term Horizon, Long Only, Portfolio Strategy

Contributor Since 2010

Clark Troy, PhD, CFP® has worked in the financial services world since 2000, and is currently a Financial Advisor at Red Reef Advisors, a Registered Investment Advisor with offices in Boca Raton, FL and Durham, NC. He worked for years as a management consultant in the financial services industry, first in hands-on roles helping firms including investment banks, hedge funds, and life insurers and reinsurers redesign processes and implement change, then as an industry analyst who advised life insurers and the technology and service vendors who support them. Clark holds a Ph.D. in Russian Literature from Columbia University and a B.A. in Russian Studies from Yale University. He is fluent in Russian and has varying degrees of competency in Spanish, French, German, Serbo-Croatian, and Slovene.

Is it just me, or does it strike anyone else as ironic that health insurers Aetna and Humana have reported results for the 3rd quarter that benefit from consumers' lower utilization of healthcare services, even while there's a debate as to whether or not Steve Jobs' failure to seek proper treatment for his cancer allowed it to spread and hastened his demise?

To return to the first point, the Wall Street Journal today reported that "Humana's medical-cost ratio, the percentage of premium revenue used to pay medical bills, fell to 80.7% from 81.6% a year earlier and 82.2% in the second quarter. Health insurers have benefited as economic turbulence has slowed traffic in doctors' offices and operating rooms, leaving insurers fewer bills to cover."  Now, it's possible this can be put down as demonstrating that the promise of consumer-driven healthcare is being realized, and that consumers are thinking about costs -- deductibles, prescription drugs -- before traipsing off to the doctor for procedures they don't need.

I don't know. I think most people don't like to go to the doctor or get tests that may call into question their own vitality and perhaps mortality, and that much of the low utilization of medical services over recent quarters reflect consumers' kicking their own plump cans down the road, as so many like to say in connection with recent debt debates. I think the short-termism of fhe quarterly earnings game is likely being reflected in short-termism with regard to health.  Until we get better insight into the specifics of the types of treatments patients have foregone over recent quarters, it's probably best to withhold judgment over Aetna and Humana's results. For all we know, deferred visits to the doctor may yet balloon into bigger costs down the road.

Chronic conditions such as heart disease, cancer, strokes, diabetes, and chronic pulmonary diseases contribute an estimated 75% of the US's $2.4 trillion in annual healthcare spend.  That's the real number we need to worry about.  It is improbable that consumers' going to the doctor less will materially impact that, however nicely it may tweak an insurer's quarterly earnings.

In 2003 Steve Jobs made his own decisions about delaying treatment for the rare pancreatic cancer that afflicted him, and it spread to his liver. In an economy that has at times seemed to be driven disproportionately by Apple, it's hard to book this as a gain.  Maybe his proximity to death spurred Jobs not just to a great graduation speech at Stanford, but to double down in his quest for immortality as reflected in the paradigm-shifting products that followed, the iPhone and the iPad. Or maybe he would have done the same and more had he gone to the doctor and perhaps managed his cancer better.  We'll never know.

In any case, it's probably best over time for both the insurers themselves and for consumers that Americans seek treatment prudently rather than defer visits to the doctor based on cost.  Deferred maintenance has not been a successful strategy with America's infrastructure, and it's unlikely to be a boon to our collective health or the costs associated with it.

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