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Exclusive: 'Wellpoint would be a primary beneficiary' if reform fails, investment firm says

"Of course, healthcare reform is a double-edged sword for Wellpoint shares. Should reform fail, Wellpoint would be a primary beneficiary."

That comes from the first page of the Cowen and Co.'s assessment of Wellpoint stock in 2010 and beyond. The argument is simple: Wellpoint's business model is uncommonly concentrated in the individual and small-group markets. Those are the exact markets that health-care reform will drastically change. Those are the markets where people get rejected for preexisting conditions, where insurers spend 30 cents of every premium dollar on administration and where rate hikes are volatile and constant. Health-care reform wants to change all of that, and if it does, Wellpoint's business model will be changed, too.

Wellpoint's "2.2 million individual members do leave it somewhat exposed to the 80% individual [Medical Loss Ration] floor contemplated in the Senate bill and Federal oversight of rating action proposed by the President," continues the analysis. In English, that means the bill will force Wellpoint to spend at least 80 cents of every premium dollar on medical care for its customers, and it means that regulators aren't likely to let Wellpoint jack prices up by 25 percent with no warning or reason. It also means that Wellpoint is not spending that much of premiums on medical care and is not keeping its rates under control now. (It's possible that "rating" is referring to regulations on things like age discrimination and preexisting conditions in this context. It's not clear from the writing, but it doesn't change the point: The bill regulates those practices, too.)

There are other insurers (Aetna, for instance) that have less to fear from reform because they aren't so highly concentrated in the marginal markets where the worst practices flourish. But in recent weeks, Wellpoint has become to health-care reform what Sen. Jim Bunning is to Senate reform. Day after day, they're proving why we need reform, even if they stand the most to lose from these changes. This isn't because they're dumb. It's because their appalling practices are absolutely central to how they do their job. Threats and scrutiny aren't nearly enough to get them to stop, because they are bound to the incentives of their system. Only actual reform will change their behavior, because only reform can change the system, and thus their incentives.

Update: I'd identified Cowen and Co. as a consultancy. They're an investment bank.

By Ezra Klein  |  March 4, 2010; 2:37 PM ET
Categories:  Health Reform  
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Next: Reconciliation and partisanship -- in graph form

Comments

why we need a Public Option in order to make these piggies compete. All profits get poured into Executive salaries....

Posted by: Geopolitics101 | March 4, 2010 3:04 PM | Report abuse

Thirty-one states ALREADY have health insurance pools run by the state in which individuals who have pre-existing conditions and can't get coverage may apply and get coverage. This program can easily be expanded to include this part of the population and to subsidize the premiums based on income. This would be a lot cheapter than the FIASCO that comprises the present bill.

Posted by: easttxisfreaky | March 4, 2010 3:06 PM | Report abuse

Ezra -This post is pretty bad. I'd call it a fountain of misinformation. First Cowen is an investment bank and the author is a research analyst, offering his/her opinion to investment managers. This is not a consulting study commissioned by WellPoint. And it's hardly an "exclusive". It's widely disseminated to institutional investors. Further, it's not even a controversial take on the impact reform would have on WellPoint.

The statement that WellPoint would "jack up prices by 25% for no reason" is ridiculous. If there was "no reason" for the company "jack up" prices then you should see WellPoint's profits increase by 25% (or more) as they pocket the entire price increase. Of course this does not happen. In reality premium increases are driven by increases in cost per unit of care and by a deterioration in WellPoint's risk pool. I think you know this...I think you also know that WellPoint has provided regulators and COngress with a detailed list of reasons for the price increases. Perhaps you'd like to refute them? But don't claim that the company hasn't given reasons for it.

I think you also know that WellPoint loses money on the California individual market (their largest individual market) and that they are forced by the state to provide subsidized coverage that causes them to lose money. So the option seems to be wellPoint puts through needed rate increases or perhaps they drop hte business entirely. Which would you prefer?

Look, we know you don't like insurance companies and that you're echoing Obama's rhetoric on them. But i think you know much more than the average politician on these issues, so I expect more from you.

Posted by: mbp3 | March 4, 2010 3:09 PM | Report abuse

I think we should get a chart to compare Wellpoint's profit margin over the last ten years and compare it to some big law firm known for suing doctors....maybe even John Edwards' firm.

Then you'll see how perverse it is to go after insurance companies while letting the ambulance-chasers go scott-free!

Posted by: FastEddieO007 | March 4, 2010 3:23 PM | Report abuse

What's so bad about requiring insurers to spend 80 percent of every premium dollar spent actually providing medical care?

It's what insurers ought to be doing and not giving large CEO bonuses etc.

Posted by: chi-town | March 4, 2010 3:23 PM | Report abuse

However, Patrick Murphy’s Web site, www.realhonestthinking.com, points out in 2008 United Health, Aetna, Humana and Wellpoint had an average profit margin of only 3.6 percent. In other words, for every $100 they earned companies got to keep $3.60. In contrast, Coca-Cola that year averaged more than 20 percent profit margin, Apple, 13.3 percent.

"The truth is that the health insurance companies are not making outsized profits," says Murphy. "Compared with many other companies their profit margins are very small. As for administrative costs, if a company like Aetna wants to expand into another state they need to lease office space, hire employees and spend money complying with that state’s insurance mandates. If they pay out everything they take in where do they get the money to fund expansion, compete and so on? Without profits, competition among insurers would decrease leaving insureds with only one insurance company in their state."

Posted by: FastEddieO007 | March 4, 2010 3:24 PM | Report abuse

mbp3 sums it up pretty well, this is a very dishonest and misleading post. I still cannot understand why you occasionally have posts like this, when you've shown in the past that you understand these issues and that insurers are not the source of our problem.

This sentence "regulators aren't likely to let Wellpoint jack prices up by 25 percent with no warning or reason." is probably the most disingenuous thing I've ever seen you write. Very disappointing.

Posted by: ab13 | March 4, 2010 3:35 PM | Report abuse

Sorry you think so. You're missing the point on the rates, though. What the bill forces Wellpoint (and other insurers to do) is offer public reasons and fair warning before rates increase. My post doesn't say that Wellpoint doesn't have a reason to increase rates (of course they do, they want to make money) but that they can currently increase rates without giving a reason. In California, regulators stepped in and demanded an explanation because the increase generated outrage, but that's obviously not always the case.

As for the point on Cowen being an investment bank, true enough. I've added a correction.

Posted by: Ezra Klein | March 4, 2010 3:45 PM | Report abuse

"However, Patrick Murphy’s Web site, www.realhonestthinking.com, points out in 2008 United Health, Aetna, Humana and Wellpoint had an average profit margin of only 3.6 percent."

FastEddie, these numbers don't actually tell us very much. A casino in Las Vegas actually keeps only a tiny percentage of what it takes in, and pays out the rest to the gamblers. But that small percentage is a huge number, because the gamblers spend so much.

I actually agree with commentators like visionbrkr that the insurance companies have become the poitical whipping boy in the rhetoric around this debate, and that the providers and Pharma are not getting the flak that they deserve for the way that they inflate costs. But if reform passes, most private insurance should continue to see very healthy profits, thanks to all the new enrollees.

Posted by: Patrick_M | March 4, 2010 3:53 PM | Report abuse

And then there is a fundamental question;

Is it moral to pit the health of individual citizens against the profit motives of a corporation, regardless of their profit margins?

The current system is especially obscene because health insurance companies can and do use rescission, deny claims and deny coverage on a routine basis to enhance their profits.

Posted by: Richard18 | March 4, 2010 3:53 PM | Report abuse

Richard18-

At the end of this reform there will still be a free-market healthcare system.

The only question is whether or not the middle class can continue to participate in that free system, or will they be forced into a government-subsidized system where their choices are reduced through heavy regulations and they will be forced to buy insurance (or put another way, pay the taxes that fund the system).

So can the middle class continue to buy their own healthcare? Or will they be forced into a new privatized form of Medicaid?

Posted by: FastEddieO007 | March 4, 2010 4:11 PM | Report abuse

Ezra - Thanks for responding. I know it's hard for you to respond to many comments but i think we all benefit when you can do it.

Let me add to my prior comments. I think you've got the timeline wrong. WellPoint did give regulators fair warning of the rate increase. They filed the CA rate increase MONTHS ago. It sat in the office of the insurance commissioner who has 2-3 months to look at it (i'm not sure which is the right timeframe in CA). If the insurance company doesn't receive any questions or feedback from the regulator then the increase is deemed to be approved. Wellpoint did not receive any feedback, thus the rate increase was allowed to proceed. This is the way it works in CA. SO the regulators had plenty of time to scrutinize the request. Either they did scrutinize it and found it to be appropriate (until the media got hold of it) or they didn't do their job. One or the other.

And your post implies (in my view) that WLP either is jacking up rates for no reason in this case, or is likely to do so in the future.

Lastly, of course WellPoint wants to make money. They also want to serve more customers in a profitable way. They lost $59 million in 2009 serving individuals in CA. Healthier people dropped their coverage, hospitals, docs and pharma companies have raised their prices. Together these things require WellPoint to raise rates. Would you prefer they continue to lose money?

WellPoint's decision was absolutely tone-deaf to the current political environment. But it was sound business. It was not done out of greed. It was not done for "no reason".

And lastly i submit that no bill being considered by COngress would fix this problem. Unless the bills can force healthier people to buy coverage (mandate is too weak in my view) or reduce costs (again i don't think there's any evidence they will) then insurance companies will need to raise rates to offset increases in their costs and sometimes these rate increase might be large.

Posted by: mbp3 | March 4, 2010 4:16 PM | Report abuse

Eddie, don't you know that the 3.6 % profit is what's left AFTER the CEO and ALL the claim-denying employees and ALL the middle managers get paid? In a single payer system, this huge expense is non-existent.

Posted by: rjewett | March 4, 2010 4:22 PM | Report abuse

The health industry is not trying to kill this 2700 page bill that they paid $600,000,000. to craft which will allow them to steal at will from us and the US Treasury.

If they wanted this 2700 page bill dead it would be dead like the public option that they killed.

Our President and representatives helped them kill this.

All 300 million people in the US could receive free public option health care, delivered from government VA system styled hospitals, paid for with sales tax revenues instead of insurance premiums, and it would save $1trillion dollars every year from the $2.6trillion spent last year.

Veterans Government Health Care is producing better health outcomes for Vets than civilian patients are receiving anywhere else in the country, at any price, including Mayo, Cleveland Clinic, Medicare, anywhere and VA’s costs are a fraction of private care’s.

Of course not everyone in the US would choose to use public care but the cost savings illustration is dramatic.

Having two systems to choose from; either a public option, or the other a private option, could serve everyone and save hundreds of billions of dollars annually.

Efficiently funded and delivered health care saves lives and saves money.

Dr. Ken Kizer who President Clinton appointed to head the Veterans Administration in 1994 turned VA health care into the model for twenty-first century health care reform.

See Phillip Longmans book Best Care Anywhere: Why VA Health Care is Better Than Yours. http://www.washingtonmonthly.com/features/2005/0501.longman.html

Posted by: BillWatson1 | March 4, 2010 4:25 PM | Report abuse

Ezra writes: "What the bill forces Wellpoint (and other insurers to do) is offer public reasons and fair warning before rates increase."

They do offer reasons, most states require them to file the rate increases with the state DOI, either for prior approval or at least for notification that rates are going up, and those filings are public record. Is there any reason to think the rate increases are not justified, other than widespread misunderstanding of how insurance companies operate?

And they also do give fair warning, in every state they are required to give 30 days notice (45 or 60 in some) before a rate increase. How much more notice do you think they should be required to give? It's a very time-sensitive business. You have to have enough run-out in your claims experience to ensure it is complete and credible, and it takes time to update systems for the new rates and prepare insured notification letters. If you add even more time to all of that to allow for a longer notification window you're stretching out the time between the experience period used to determine the increase and the date when the rate become effective, increasing the likelihood that the rates will be insufficient because they don't reflect the most recent experience. All the constraints I've mentioned already result in roughly a 6 month gap between the experience period and the rate effective date, extending that will lead to a lot more insufficient rate increases, and those inadequate premiums will need to be made up for in the next cycle of increases.

Posted by: ab13 | March 4, 2010 4:25 PM | Report abuse

Ezra writes: "My post doesn't say that Wellpoint doesn't have a reason to increase rates (of course they do, they want to make money)"

Yet another misleading and dishonest jab at the insurers. Are these rate hikes increasing their profits, or just trying to maintain the priced-for profits? You and I both know that it's the latter. They are not increasing rates to make money, they are increasing rates to keep from going out of business, which is what will happen if you don't allow them to charge actuarially sound premiums.

-----"they can currently increase rates without giving a reason. "

If they are increasing rates without a reason, why are insurer profit margins fairly steady? You're implying here that they are just arbitrarily giving rate increases to "make money", when all of the facts are against you.

If you just want more disclosure or "public reasons", go to the state DOIs and get some rate filings. They're all there, publicly available, in many cases they are right there on the state websites. Is the average Joe going to know how to interpret an actuarial analysis of claims experience? Of course not, so what good would more disclosure do in this case? The "public reasons" are already there, but no one is bothering to look at them because it's easier to just assume the insurers are gouging them.

Posted by: ab13 | March 4, 2010 4:34 PM | Report abuse

One does wonder where the 30M+ of "newly insured" folks are going to be buying their insurance once they're mandated to have insurance.

Some of those people are in the high risk pool.

Quite a few of them are good health, low risk pool

Many of them are going to be subsidized by Uncle Sam, with no Public Option to provide competition.

And with the Corporate Mandate not exactly at the level one would have hoped for in the bill, where are those people going to be looking for insurance on an individual rather than group level?

Would Wellpoint prefer the Status Quo? Of course.

Would Wellpoint prefer the Senate Bill to more progressive alternatives that have bit the dust?

Well, my thought would be to recall that Wellpoint actually *drafted* the Baucus Bill that is the backbone to the Senate Bill.

We'd be pretty delusional to think Wellpoint drafted their own death warrant, or even a bill that didn't create a nice batch of profit for them.

I think Ezra keeps looking for selling points on why the bill is Horrible for Big Insurance. It isn't. If it was, it wouldn't have passed, and it won't pass.

It's not as good as the Status Quo for them. But they've created a fallback position that is very, very, very good for them relative to real reform. Because frankly the bill is much less about "reform" and much more about "coverage". And they've gamed the bill to channel a lot of that coverage towards themselves rather than public alternatives.

John

Posted by: toshiaki | March 4, 2010 4:44 PM | Report abuse

Thanks Patrick

Individual and small group markets are dying. Regulators and ezra would like to force market segments to lose Money. Most people don't realize insurers are already required to stay in non profitable market segments. Its like if state regulators required the Washington post keep printing a daily paper if blogs were more profitable. While regulation is necessary for obvious reasons people have no clue how much it adds to costs.


Ezra

How much should Wellpoint lose in the individual market to satisfy you?

Posted by: visionbrkr | March 4, 2010 4:44 PM | Report abuse

Some Senator's wife sits on the board of Wellpoint...the name escapes me...

Posted by: luko | March 4, 2010 4:50 PM | Report abuse

Wellpoint would not prefer the status quo. That market is dying a slow and painful death. Don't we hear every day that the enrollments in those markets are decreasing

Posted by: visionbrkr | March 4, 2010 4:52 PM | Report abuse

FE007 "The only question is whether or not the middle class can continue to participate in that free system...can the middle class continue to buy their own healthcare? Or will they be forced into a new privatized form of Medicaid?"

This is a joke right?

Right now, middle class people (defined as the median income +/- 30%) can't afford health care, unless they get it through their employer and employers continue to drop coverage or make it prohibitively expensive. This is why we need HCR. As CA rate hikes show, middle class people in the individual market can't afford coverage.

It is the subsidies that will allow these people to afford insurance.

It is the exchanges that will allow these people to compare insurance policies easily.

It is the exchanges that will guarantee that there is a minimum level of coverage available to everyone.

Posted by: srw3 | March 4, 2010 5:10 PM | Report abuse

How can an analyst report be an "exclusive" piece?

Posted by: wisewon | March 4, 2010 5:26 PM | Report abuse

Rjewett

As I've said before Medicare and Medicaid waste fraud and abuse is much greater than insurers profits. when that changes then I will jump on your single payer bandwagon.

Posted by: visionbrkr | March 4, 2010 5:41 PM | Report abuse

You have a touchingly naive faith in the efficacy of rate regulation.

Posted by: ostap666 | March 4, 2010 5:58 PM | Report abuse

Ezra

80% mlrs are sadly easy to reach in this market.

Posted by: visionbrkr | March 4, 2010 6:00 PM | Report abuse

Ezra

80% mlrs are sadly easy to reach in this market.

Posted by: visionbrkr | March 4, 2010 6:00 PM | Report abuse

Ezra says:
Wellpoint's "2.2 million individual members do leave it somewhat exposed to the 80% individual [Medical Loss Ration] floor contemplated in the Senate bill and Federal oversight of rating action proposed by the President," continues the analysis.
__________________

Let's not get ahead of ourselves there, Ezra. The latter part of your statement, regarding gov't regulation of insurance premiums - that is part of Obama's plan, not the already-passed Senate bill. And regulation of companies cannot be included in any reconciliation bill. So it is NOT something that will be part of reform.

Posted by: boosterprez | March 4, 2010 7:36 PM | Report abuse

Do you know UnitedHealth opened a bank in 2005 - OptumHealthBank.

Why? To take advantage of the expansion of high deductible health plans and the Health Savings Accounts that go with them.

As of June 30, 2008 OptumHealthBank collected more than $34 million in service charges and $46 million in interest on those deposits and returned a profit of $33 million to UnitedHealth Group.

WellPoint convinced the feds they are not an insurer but a financial services company.

This is where insurers see their future - banking. They'll continue shifting the financial risk to us through these high deductible plans and collect all those risk-free fees on our deposits in Health Savings Accounts.

I believe this is a big hold in the coverage of the big rate hikes across the county.

Read these 2 informative articles from the LA Times:

Insurers see banking future
http://articles.latimes.com/2008/oct/22/business/fi-insure22

Health savings accounts are ill-advised
http://articles.latimes.com/2009/feb/04/business/fi-lazarus4

Posted by: FauxReal | March 4, 2010 7:41 PM | Report abuse

Some Senator's wife sits on the board of Wellpoint...the name escapes me...

Posted by: luko
_______________

That would be Evan Bayh's (D) wife, Susan Bayh, that sits on Wellpoints Board of Directors.

Posted by: boosterprez | March 4, 2010 7:50 PM | Report abuse

Faux real

that's ridiculous. HSA's have very low contribution limits. Try to get your regular bank to administer your HSA or HRA. They won't because there's relatively no money in it as compared to the admin cost.

Sorry in advance for the double post. darn cell phone.

Posted by: visionbrkr | March 4, 2010 8:32 PM | Report abuse

Faux real

that's ridiculous. HSA's have very low contribution limits. Try to get your regular bank to administer your HSA or HRA. They won't because there's relatively no money in it as compared to the admin cost.

Sorry in advance for the double post. darn cell phone.

Posted by: visionbrkr | March 4, 2010 8:32 PM | Report abuse

Ezra - I think that several commenters have raised more than enough issues on this post for you to write a follow up post on this.

Posted by: MBP2 | March 4, 2010 9:22 PM | Report abuse

I have seen executives from Wellpoint on cable a few times, and frankly they do not look worried at all. They didn't seem the least bit worried when asked about the rate increase probe in CA. What was said that got my attention, was a fairly benign comment about other carriers not being able to weather the storm and thus might need to close their doors.

BTW, mbp3 is quite correct. There is nothing in this bill that will bend the cost curve down. The intention was to get everybody covered no matter the cost.

BTW, I am opposed to health care insurance believing policies vary so much and care varies so much, that finding any equality is impossible. I am waiting for that 1400 check due to come to me because the uninsured will no longer be using the ER. Congressman Sherman insists every family with insurance will see this reduction.

Posted by: jkachmar | March 4, 2010 9:42 PM | Report abuse

How would you distinguish a private insurance company that has its rates set by the government, its payouts set by the government, and its costs set by the government from a purely government entity.


The answer: their stationary won't have the "Obama" logo on it (yet).

"Nationalizing" the un-profitable private insurance companies in a few years from now is really just a formality!

This is a SINGLE-PAYER system from Day 1! The Democrats actually are passing a Single-Payer system, except they've managed to disguise the hugest tax increase EVER on the middle class in the form of a mandated premium payment to a private insurance company(which is just a federally-managed holding company for the federal government).

I've got to give Jacob Hacker a lot of credit!!! He really pulled off one of the greatest cons on the American people ever!

Posted by: FastEddieO007 | March 5, 2010 8:39 AM | Report abuse

Please look at (or listen to, or read the transcript of) the PBS program - - Bill Moyers' Journal of March 5, 2010. He interviews Wendell Potter (former CIGNA VP, who had an epiphany viewing an open-air HC clinic in Appalachia with its rows of patients awaiting the only medical care they can acquire) and Dr. Marcia Angell (Harvard medical lecturer and former Editor-in-Chief of NE Journal of Medicine).

He asks pointed questions of both about "the President's current health bill" and they have different opinions on whether or not it deserves congressional vote support.

Surprising to me, I came to the conclusion that it SHOULD NOT BE PASSED without substantive additions and changes. You may reach opposite conclusions.

Make up your own minds, readers, but PLEASE listen to both critiques beforehand.

Posted by: Bill_Marston | March 6, 2010 2:42 PM | Report abuse

Ezra, your post from yesterday titled Why insurers don't control costs (www.www.bit.ly/98BfPK) and this one from today sound like they were written by different people.

Wellpoint may engage in some nasty selection, skimming and lobbying practices and may benefit from the failure of health reform. But Wellpoint's premiums are not now or will never become unhinged from reason.

Health insuers' premiums go up because health spending go up. One reason for this is that physicians and hospitals regularly oversell unnecessary high tech procedures at an astounding rate. For example, a recent study in the Journal of the American College of Radiology www.bit.ly/a6zmev showed that 1/4 of all radiology referrals in a large medical system were unnecessary. In the US healthcare market, there is no good way to stop referrals of this kind from being carried out. All of the incentives for hospitals, specialists, medical device manufacturers, pharmaceutical companies - and yes, health insurers - are aligned keep healthcare consumers on an ever-rolling treadmill toward higher spending.

This problem is going to continue unless we find the right way to say no to unnecessary medical care. We must find a way to stop the sellers of unnecessary medical technology from killing our wallets and our budgets. Until we do, health insurance premiums will continue to grow at astounding rates.

Posted by: tconcannon | March 11, 2010 2:35 PM | Report abuse

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