Big Winner in Healthcare Reform? Insurance Companies, Eventually

The historic healthcare reform bill passed by Congress on Sunday night focuses, first and foremost, on insurance companies. And, despite the insurers' opposition to reform, they stand to benefit from it in the long run.

The short-term changes that the legislation requires will have a negative impact on insurer profits. Aside from the reduction in government payments to Medicare Advantage plans, insurers will no longer be able to sell policies with lifetime caps on insurance, exclude children from coverage on the basis of pre-existing conditions, or drop adults when they're sick under a policy known as "rescission."

Last year, insurance company executives stoutly defended rescission in congressional testimony on the grounds that some people lie on insurance applications. That didn't fly with Congress or the public, and now the companies are seeing the result. Similarly, anger at the decision of Anthem Blue Cross of California to raise individual insurance rates by 39 percent -- coupled with similar cases across the country -- helped overcome opposition to the reform bill in Congress.

Starting in 2014, insurers will no longer be able to deny coverage to people with pre-existing conditions -- a requirement that America's Health Insurance Plans, the insurer trade association, has predicted will lead to an explosion in premiums because the legislation will not create universal coverage. In the early going, premiums are indeed predicted to rise to those who earn too much to merit government subsidies; but other individuals will see their premiums drop, according to the Congressional Budget Office. Moreover, as insurance companies get 32 million new customers, they will receive a tremendous infusion of cash that should enable them to reduce their prices.

When health plans have to compete for the business of individuals and small businesses in the insurance exchanges, they will have an additional incentive to moderate their premiums. In the long run, if insurance costs drop, more of the 23 million people (a third of them illegal immigrants) who remain uninsured will be able to afford coverage, and there will be less danger that people will buy it only after they get sick.

The bill requires that insurers provide a certain minimum level of benefits in the health insurance exchanges that individuals and small firms must use to buy coverage, beginning in 2014. That should help carriers because they can charge more for mandatory benefit packages than for the catastrophic plans that they often sell in the individual and small-group markets. Also, people who are now covered by their employers will be able to buy insurance through the exchanges if the actuarial value of their plans is less than 60 percent and/or their share of the premiums costs more than 9.8 percent of their income. While it's unclear how many people will be affected, moving them from a low-benefit employer-provided plan to a higher-benefit individual plan purchased in an insurance exchange should also raise revenues for insurance companies.

There are some downsides for insurance companies: For one thing, the legislation will cut about $200 billion in government payments to Medicare Advantage plans. Those companies that are heavily involved in that market, such as Humana, will certainly feel the pinch. But as Medicare tries to find ways to pass financial risk onto providers, private insurers will be enlisted to help, because they know more about managed care than the government does.

As for the excise tax on so-called "Cadillac plans," the final version of the bill has pared this down to predicted revenue of about $70 billion over 10 years. That's a very small portion of health plan revenues and will be passed onto employers, in any event. And the $74 billion in other new taxes that will be levied on insurance companies to pay for reform is a rounding error compared to the size of the revenues they'll get in the next decade.

So if this reform bill is so good for insurers, why have they opposed it, and why does the stock market view reform as bad for insurance companies? I think it's because of short-term thinking: Instead of focusing on how the expansion of coverage will provide new business and shore up a rapidly eroding system, insurance executives and investors only see increased government regulation that will restrict the insurers' freedom of action. They should rethink their position in light of the opportunities this legislation opens up.

Tune in tomorrow for my take on how the reform bill will affect healthcare providers.

Image supplied courtesy of Daniel Steger at OpenPhoto