How ObamaCare Threatens Solvency Of Health Insurers – Pacific Research Institute

How ObamaCare Threatens Solvency Of Health Insurers

One of the most remarkable outcomes of ObamaCare is how the stock market has treated commercial health plans, which have rallied significantly.

In the two years between the 2008 and 2010 elections, the Morgan Stanley Healthcare Payors’ Index rallied 26% (annualized), vs. only 9% for the S&P 500.

Outperformance increased even more since the mid-term election. Investors believe that the government guarantee of millions of customers to health plans will lead to profits. Unfortunately, this optimism is likely unfounded.

ObamaCare distributes federal grants to states that encourage their insurance departments to increase power of prior approval of premium increases.

And the coming wave of political interference will threaten health plans’ very solvency. We already know that such laws do not keep a lid on health costs.

In Massachusetts, the 2006 health reform imposed a “mandate” to carry health insurance, but also to draconian limits on premium hikes.

Using the power that his counterparts in many states might soon enjoy, the state’s Insurance Commissioner refused 235 of 274 requested rate hikes for April 2010, and demanded that plans rebate premiums that had already been paid.

But medical costs in Massachusetts increased faster after the new regulations than before.

Massachusetts’ health plans are hemorrhaging cash, and a senior regulator has described the mess as a “train wreck.”

In a new study, “Bust or Bailout? The Future of Private Health Plans Under ObamaCare,” I model health plans’ future solvency under these conditions.

My analysis concludes that the state’s largest health plan, Blue Cross Blue Shield of Massachusetts (not involved in the research) is likely to be insolvent by about 2016 — even if the state releases its death grip. What then? Another taxpayer bailout?

Nor is there evidence that prior approval of premium increases has protected consumers from unreasonable rate hikes. My study examines data on premiums and premium-review laws for small-group premiums in 43 states in 2006 and 2008.

Nineteen states were “file & use,” which means that health plans must submit premium increases to the insurance commissioner, but he has no power to reject them.

Twenty states required prior approvals of rate changes by the insurance department, and four were unregulated.

There does not appear to be any connection between prior approval and a lower change in rates from 2006 to 2008, nor the absolute value of rates in 2008.

The average increase over the period was 8% for both file & use states and states requiring prior approval. The highest increase in the file and use states was 27% (in Virginia) and the highest in the states which required prior approval was 25% (in neighboring Maryland).

Of the 45 states for which premiums were available for 2008, the average rate in 2008 was very slightly lower in file and use states ($345 per month) vs. states with prior approval ($351).

Data for the much smaller individual market are available for 29 states in 2007 and 2009. Of the 22 of the states that legislated prior approval of rate increases, four allowed file and use, and three were unregulated.

The highest increase in the four file and use states was 13% in Texas, vs. 29% in New York, the state requiring prior approval that experienced the highest increase.

Health plans pay medical claims from providers whose charges have been rocketing skyward. In California, a recent analysis of daily inpatient charges for hospitals revealed that payments from private health plans increased from $1,954 in 2000 to $5,061 in 2009 — 159% — during a time when consumer prices increased by only 25% nationwide.

The charge for a normal (non-Caesarian) childbirth went up from $3,805 to $6,424 — 69%. But California will soon have a law capping premiums — while actual medical costs continue to rally.

Health costs will only decline when patients, not politicians, directly control more of our health spending. This cannot happen until President Obama’s health law is repealed.

In the meantime, investors should remain wary of Wall Street’s enthusiasm for health plans under ObamaCare.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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