A Perfect Storm For Health Care Reform?

Unless the war with Iraq interferes this could be the year for major health care actions at both the national and state level. Why? According to the December 23, 2002 Managed Care Week (not available online) these factors are coming together:

(1) A continued rise in health care premiums. For several years now, industry analysts and pundits have predicted an end to the double-digit premium hikes that restored many health insurers to profitability in the late 1990s. But 2003 looks to be another good year for insurers, with average premium hikes easily outpacing medical cost increases of 15%.

(2) Increasing ranks of the uninsured. Lately, it has seemed that a good year for health plans means a bad year for those teetering on the brink of losing coverage. Already, small employers in a few areas of the country have reported discontinuing workers' health insurance because of skyrocketing premiums

Far more common are workers who have been priced out of the market, as employers pass on a larger share of premiums and raise workers' copays and deductibles. In fact, the number of uninsured is on track to reach 45 million in 2003, representing a "political albatross that must at some point exact its revenge," says Standard & Poor's.

"It seems like a lot of people are suffering for the benefit of a few," says Robert Booz, vice president, health and managed care at Hartford, Conn.-based Conning Research and Consulting.

(3) Stable profitability. Most insurers have enjoyed improved profitability, although analysts aren't sure how much longer the good times would last. The nation's HMOs collectively reported a 162% increase in profits for the first three months of 2002, compared with the same period in 2001, according to Weiss Ratings, Inc. What's more, those profits were more evenly spread across managed care companies, with 73% of HMOs reporting a profit during the first quarter of 2002, compared with 60% during the 2001 period.

But insurers could see a public backlash against their financial health. "The managed care industry is doing remarkably well financially," Booz says. "Wall Street numbers are very strong. The issue is how much is too much, from a profit point of view?"

This could result in local regulators seeking to limit new premium increases:

The three factors described above--continued premium increases, stable profitability among many health insurers and the corresponding rise in the number of people without insurance --are conspiring to create a "perfect storm," predicts Booz.

"You're going to see more cases where plans come in saying we need 15% to 18% [rate increases], and regulators are going to say, 'Gee, is that so you can increase earnings by 25%?'" he says.

And even action on the federal level:

Although Republicans soon will be in control, the Senate still will be ruled by a slim majority. "It may give insurers more latitude in the short term, but I doubt it's going to prevent more government intervention down the road," says Standard & Poor's analyst Joe Marinucci.

The threat of war in Iraq could temper lawmakers' itch for regulation, though. "Were we not in a situation of uncertainty on the world stage," Booz says federal proposals to reduce the number of uninsured would be more likely. "What I do see is the legislature looking at affordability and accessibility and the tremendous number of uninsured."

The past few years have been good for many health insurers, says Standard & Poor's. But downward pressure on pricing from employers and regulators and upward pressure on health care costs could combine to squeeze health insurers' margins in the years to come.