Monday, July 31, 2006

 

How much is too much?

Today's WSJ asks whether or not aggressive health insurance profits are beneficial in the long run. Last week Aetna shares fell 17% on news of rising medical cost versus premium ratios as well as a 30% cut in their projected participant growth for the remainder of the year.
Last year, the top seven U.S. health insurers earned a combined $10 billion -- nearly triple their profits of five years earlier. The windfall came as insurers raised their prices faster than underlying health costs.

Now the good times may be rolling to a halt. Health insurance has become so expensive that many smaller employers are dumping insurance altogether. If insurers don't do something, they may find their business shriveling. Yet if they restrain price increases, or appear to, they get hammered by Wall Street.
The industry's aggressive stance on pricing is largely due to shifts in overall strategies that now emphasize keeping profits and premiums quite a bit ahead of medical costs. Only now it appears that medical cost inflation is slowing. According to WSJ the average operating margins in the late 90's were around 4 percent in a good year. Today they are much closer to 8 percent. Some analysts are fearful that investors' demands of higher profits will create an environment ripe for adverse selection. Those that need health insurance the most will be forced to continue enduring premium inscreases, while healthy pools will be cherry picked by low cost providers pricing for growth. These conditions create unsustainable pools of risk for insurers, leading to falling stock prices.

I for one would welcome increased competition with open arms and think it would ultimately help, not hurt, the industry as a whole. Certainly in order for there to be new winners, some insurers in the winners circle today will have to lose.

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