What This Means for Health Insurance Stocks–and Your Premiums
When Congress passed the Affordable Care Act (ACA) in 2010, liberal critics feared that the Obama administration had “cut a deal” with for-profit insurers. Single-payer advocates were particularly incensed when reformers invited the insurers’ lobbyists to the table to help hammer out the details of the legislation. Some charged that, in return for the industry’s support, the administration agreed to a mandate that would force 30 million uninsured to buy private-sector insurance (or pay a penalty,) thus guaranteeing carriers millions of new customers, and billions in new revenues.
Why Health Industry Insiders Were Offered Seats at the Table
At the time, I didn’t believe that the administration was selling out to the health care industry. Reform’s architects offered insurers, drug makers and device-makers seats at the negotiating table, in part because because they hoped to persuade them to help fund reform – and they succeeded.
Ultimately, the industry agreed to shell out over $100 billion in new fees and taxes to help fund the legislation. Those contributions are critical to financing subsidies for low-income and middle-income Americans.
The Obama administration also did not want to watch re-runs of the “Harry & Louise” television ads that helped torpedo “HillaryCare.” Here too, they prevailed. In a new series of 2009 ads, the make-believe TV couple were all smiles: “A little more cooperation, a little less politics, and we can get the job done this time,” Louise declares.
Still, some feared that the administration was giving away the store. “No wonder the cost of reform keeps going up and up and up,” said Bill Moyers. “Could it be” he asked, “that Harry and Louise are happier because, this time, they’re in on the deal?”
But Didn’t the Administration Capitulate On the “Public Option”?
Skeptics on the Left also believed that reformers agreed to quash the “public option”—a government insurance plan that would compete with private sector carriers.
The truth is that Connecticut Senator Joe Lieberman ( sometimes known as “the Senator from Aetna”) almost single-handedly killed “Medicare for Everyone.” When Lieberman said “I’m not going to let this happen,” Congress was on the verge of passing legislation that would let Exchange shoppers choose between a public option and private sector insurance.
Then, in the fall of 2009 ,Lieberman, who was supposedly a Democrat, stood up and brazenly announced that if reformers didn’t drop the public option from the plan, he might join the Republicans in a filibuster that would stop the health care reform bill come to the Senate floor. In other words, he was threatening to kill reform.(At that moment in time, Lieberman could have drummed up just enough votes from moderate Democrats to help him do this.)
In October of 2009, I wrote:: “This is vintage Lieberman. He’s an opportunist. I knew him many years ago, back in Connecticut, when I was working for a a reform candidate in New Haven who was challenging the Democratic machine. Lieberman wavered on the sidelines, waiting to see who was going to win. He didn’t want to risk picking a losing team.” For Lieberman, politics was not about issues and what might be best for his constituents. It was all about Joe.
Was he doing the administration’s bidding?
Hardly. Lieberman and Obama were never soul-mates. Indeed, in 2008, Lieberman, nominally a Democrat, appeared at the Republican convention where he endorsed John McCain– and criticized Obama.
In 2009, many observers agreed that Lieberman wanted to stop the public option, not just out of loyalty to the Connecticut insurance industry, but out of spite. He was still furious that Democratic party leaders allowed liberal Ned Lamont to run against him in the state primary. Lieberman wanted to “show” the Obama administration what happens to anyone who dares to cross him.
What Investors Did Not Understand
In 2012, two years after President Obama signed the bill, the myth persisted that the administration had gotten into bed with the insurance industry, As proof, critics pointed out that from 2010 to 2012 Aetna’s shares gained 33%, market leader UnitedHealth Group soared 65% and Humana climbed 76% Clearly Wall Street knew that in 2014, insurers were going to clean up.
But strangely, in just the past two months–on the eve of the Exchanges’ opening– investor confidence has weakened:
- On September 27 Morningstar, a premiere investment research firm, warned: “the new state Exchanges are hardly a bonanza for managed care companies. . . A consensus [is]emerging that state-based exchanges” will mean “relatively low [profit] margins for Managed Care Organizations.”
- On October 14, Investors’ Business Daily reported that the medical-managed care group it tracks is sliding:
“It is now ranks No. 82 of 197 industry groups vs. No. 20 four weeks ago.”
- On October 17 when industry behemoth UnitedHealth Group (UNH) announced earnings, it’s share price plunged In 23 of the past 24 quarters, it has exceeded Wall Street’s expectation. This time it didn’t. Over the next three days the stock plunged by more than 8%. Shares of Aetna, Wellpoint and Humana also slid.
What is going on?
Wall Street is beginning to figure out that under Obamacare, for-profit insurers are not going to make out like bandits.
Investors who drove carriers’ shares to record heights were misled by media reports that the White House had “sold out” to insurers. Meanwhile, they overlooked the many ways that Exchange regulations would whack carriers’ profit margins:
- Insurers can no longer shun customers suffering from “pre-existing conditions”—and they cannot charge them more.
- All policies must offer free preventive care.
- The amount that a carrier can ask patients to pay out of pocket is capped.
- But insurers cannot cap the amount they pay out in a given year, or over the course of a life time.
- All Exchange policies must cover the 10 essential benefits—no more “Swiss Cheese” policies filled with holes.
- Perhaps worst of all, from the industry’s point of view, if carriers don’t spend at least 80 cents of every premium dollar on medical care for individual and small business policyholders (85 cents for large groups), must send rebates to customers, letting them know they were overcharged.
In order to keep their seats at the table, insurers also agreed to pay annual fees to help fund reform. The fees begin at $8 billion in 2014, grow to 14.3 billion in 2018, and then rise to track any growth in premiums.
Finally, Wall Street ignored the provision in the ACA that reins in overpayments to Medicare Advantage insurers. Last week, when UNH announced earnings, it cited this as a reason it is lowering projections for next year’s profits.
Virtually No One Actually Read the Bill
Why didn’t investors recognize the many ways the ACA would squeeze carriers? Like most Americans, they hadn’t taken in the details that make the ACA both strong and complicated, with checks and balances embedded on virtually every page.
Most of the reporters who spread the rumor that the administration had “caved” to insures also hadn’t read the legislation: “Too long, too complicated, too many details,” they groused. It was easier to simply repeat what the pundits said.
To be fair, by 2010, print journalists were trapped on a high-speed information highway where they were trying to compete with bloggers working in “real-time.” Flogged by editors who wanted the story “Now” they just didn’t have the time to hunker down with the Affordable Care Act.
Meanwhile, by then, most publications had eliminated the fact-checkers who would have realized that the text of the legislation was their only reliable “red check.”
I Was Just Plain Lucky
Fortunately, in 2010, I was no longer on staff of a daily newspaper or a weekly magazine. Back then, the non-profit foundation where I worked was run by old-fashioned bosses who gave me great freedom to do in-depth research– and try to make sure that what I wrote was true. As a result, I had the time to read the Affordable Care Act, more than once. That was my job. (When I explained this to Lou Dobbs, at first he was incredulous, then he laughed. But ultimately, I think he was convinced.)
Because I understood how the ACA’s regulations would hem in insurers’ profits, in the Spring of 2010, I wrote that under Obamacare, for-profit insurers would not be big winners. Quite the opposite.
How the Insurance Industry Mis-Calculated
Okay, maybe investors and reporters did not read the bill. But the insurers’ lobbyists did. After all, they were “at the table.” Why, then, did they swallow the new rules and fees that would cut into their profits?
“Because there is nothing the health insurance industry wanted more than an individual mandate to force people to buy their product,” explains Consumer Watchdog’s Carmen Balber.
As the Center for Public Integrity (CPI) points out, when the reform law passed in 2010, “the Democratic Party controlled the White House and both houses of Congress. By supporting the law, the industry was able to stay in the game on a very complex piece of legislation.”
Privately, the insurers’ lobbyists believed that Obama would not be re-elected in 2012. Down the road, they assumed that conservatives would help them overturn the parts of the bill that they didn’t like. This is why, even while loudly professing their support for Obamacare insurers were quietly funneling two-thirds of their campaign contributions to Republicans.
As they hoped, by October of 2011, the political environment had changed dramatically. “Democrats no longer hold a filibuster-proof majority in the Senate, the House is controlled by Republicans and the president is in a tight race for re-election,” CPI noted.
Insurers now began publicly criticizing Obamacare. At this point they openly lobbied for new legislation that “would effectively gut” the provision that insurers must spend 85% of premiums on medical care.
But to the industry’s utter chagrin, in November, President Obama won.
Ultimately, carriers would lose on every provision in the Affordable Care Act that they had hoped to see repealed.
State Regulators Develop Spine
Then came the final blow: Last summer, as carriers began proposing rates for the policies they hoped to sell in the Exchanges, state regulators flexed new muscles.
The ACA had set aside $250 million for state insurance departments to support an “enhanced rate review process.” Meanwhile the administration encouraged regulators to get tough– and many clamped down..
Insurers selling plans in Portland, Oregon ultimately were forced to reduce their rates by nearly 10% on average. Three of the 12 insurance companies in that market had to lower their rates more than 20% compared with what they requested.
In Maryland, Aetna filed a proposal with state insurance regulators to raise its rates 25.4 percent, the highest of any carrier. The rate the state approved July 26 was 29 percent lower than what Aetna sought, while other carriers saw their proposals cut back by as much as 33 percent.
Aetna backed out of Maryland.
In the end,, Aetna also fled California, New Jersey, New York, Georgia —-and Connecticut. “As corporate identity crises go, this is like L.L. Bean quitting Maine or Apple leaving California–for the Moon ”The Wall Street Journal commented.
Aetna is now participating in Exchanges in just 16 states.
Even in states where regulators didn’t reject bids, the Exchanges forced insurers to compete on price. Brand-name carriers who able counting on high premiums to offset the costs of the new regulations soon realized they couldn’t compete with non-profit insurers who don’t have to deliver profits to investors.
For consumers, this is good news. When it comes to the quality of the care that they deliver, and customer satisfaction, non-profit carriers get the highest marks..
In the end, the biggest for-profit insures backed away from the exchanges. WellPoint wound up participating in Exchanges in only eight states. UnitedHealth will be peddling policies in four. .
“It’s almost surreal to see the most dominant company in the industry completely sitting out the launch of the . . . exchanges,” observes Deutsche Bank’s Scott Fidel.
So much for having a seat at the table
(Note to readers: A shorter version of this post appeared on HealthInsurance.org.
Soon, I plan to write about how drug-makers, device-makers and hospitals will fare under Obamacare, and where there shares are likely to be headed over the long term.