Health Insurance Reform Impact on health Insurers Part II

Yesterday's post talked about how

In 2014, insurers will find that many of those new customers will be coming from low-income households. These are families who are not poor enough to qualify for Medicaid, but too poor to purchase insurance without the government subsidies that will become available in 2014.

Today about one-third, or nearly 15 million of the 47 million uninsured live in households earning between $25,000 and $50,000. These are the families who will be receiving good subsidies—and they are likely to sign up for insurance.

But many will need extensive care. According to a 2009 report issued by the Kaiser Family Foundation, 11% of the uninsured are in “fair “or “poor” health, compared to 5% of those with private insurance. About half of all uninsured adults suffer from a chronic condition. About 75% have gone without insurance for more than one year; 55% have not had insurance for more than 3 years. Some haven’t seen a physician during that time. Others have seen doctors, but have not been able to afford the medications physicians prescribed. These patients are likely to need more tests, treatments and surgeries than the average customer.

Keep in mind that, under the new reform law, insurance companies will not be able to charge these new customers more than they charge others in their community. Moreover, insurers will have to offer all patients comprehensive insurance that meets a high bar defining basic benefits. No more “Swiss cheese” policies filled with holes. This is all fair. But it does mean that insurers will be operating in an unfamiliar marketplace, where the rules are designed to benefit patients, not the corporations that sell them coverage.

Of course, not all of today’s uninsured are poor: 9.7 million live in households earning over $75,000 a year. Why don’t they have insurance? Some suffer from pre-existing conditions that have made it impossible for them to secure insurance. Most likely, they will buy coverage adding to the number of sick patents in their insurers' pool.

Many others in this income bracket are healthy, and haven’t bought insurance because they just don’t think it’s a good value. Under reform rules, most earn too much to receive government subsidies. Unless premiums are significantly lower than they are today, many may well decide to pay the penalty rather than buy insurance.

After all, the penalties for individuals who ignore the mandate are surprisingly low: $95 in 2014, $325 in 2015, $695 (or up to 2.5 percent of income) in 2016. Families will pay half the amount for children, up to a cap of $2,250 per family. After 2016, penalties are indexed to the Consumer Price Index.

In addition, roughly 40% or about 19 million of the 47 million uninsured are 18-to-34-years old. Most in this group are healthy, and just don't believe that they need protection. Under the reform legislation, some under the age of 26 will sign up for their parents’ insurance. But many of these invincible youngsters are likely to shrug, and pay the puny penalty.

As a result, analysts at Fitch, the bond rating agency, observe: “It is not unreasonable to envision that too many new sick customers will overwhelm the individual segment of the market, driving many health plans from it altogether.” In other words, these Fitch analysts are suggesting that a fair number oy insurers may not even try to compete for the new but unprofitable business in the Exchange.

“This could become most acute under a scenario in which healthy, younger individuals decide to pay the penalty as opposed to purchasing coverage,” the Fitch analysts write, “and older individuals let policies lapse during periods when they do not need medical services, and purchase coverage only when they face a pending medical need, such as a surgery or expensive sets of tests or treatments."

This is why I predict that sometime between now and 2014, Congress will lift the penalties, and change the rules to make it impossible for someone to pay a penalty--and then buy insurance when he or she falls ill. The rest of us cannot afford to carry "free riders." Some have suggested that when a person decides not to buy insurance, he should be required to sign a document saying that he will not try to buy insurance for three years, taking the financial risk that he will be in an accident or become sick during that period of time and wind up broke, with medical debt that he will be paying off for years.

We need young, healthy people in the pool or insurance will become unaffordable for everyone.

Make no mistake, there are many unknowns. We don’t yet know whether premiums will be high enough to guarantee that insurers will recover the dollars they spend on new customers. But industry analysts predict that rate increases will be held in check by the new rules on the percentage of premiums’ that insurers must pay out, and by heightened competition for customers, who will have more choice of plans than they currently do in the individual market. Insurers "will be free to price themselves into oblivion if they choose to do so," Sheryl Skolnick, an industry analyst with CRT Capital Group, told the Washington Post.

When all is said and done, it strikes me that the cuts and regs that go into effect in the next four years could easily lead to an industry shake-out. My guess is that some for-profit insurance companies won’t make it to 2014

On Wall Street, analysts vary in how they assess the net effect of reform legislation on insurers, but no one is jubilant. Keep in mind that most Wall Street analysts would prefer to be optimistic. Most companies are in the business of selling stocks. It is not good for business to be bearish.

But everyone on the Street knows that while insurers will have more customers, profit margins are likely to be even lower than they are now. At best, this could prove to be a wash.