Heal Thyself

Categories: Health Care

Price of health insurance outpaces the cost of care

It seems like every time you turn around there's another headline announcing that they're drowning in money at UnitedHeath's Minnetonka headquarters. The healthcare giant is the nation's second-largest, with some 65 million subscribers and annual sales topping $45 billion--a 22 percent increase over last year. Juicy numbers, to be sure, but lately Wall Street is sounding a little concerned that the party may be starting to wane.

The Wall Street Journal today carries a terrific analysis of the health insurance industry's paradoxically pale prospects:

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 story quotes a consultant who calls aggressive pricing a "long walk off a short pier," noting that no one stays in business long if their prices erode their customer base. Insurers have gotten away with raising prices even as costs go down, the consultant adds, because most employers don't realize healthcare inflation is decelerating. And why would they? UnitedHealth has entire divisions peddling health-savings accounts and other insurance "products" that purport to save money for employers by creating incentives for workers to seek less care.

If you wondered where the booty at the heart of the stock-options probes underway came from, there it is. And while the booty will remain considerable, particularly in the eyes of the wage-slaves who can no longer afford health insurance, all signs are that it's poised to dwindle. At the beginning of the year, for instance, CEO Bill McGuire's options were worth a cool $1.6 billion. UnitedHealth stock was trading at its 52-week high at the time: 64.61. It's trading at 47.83 right now, quite possibly in part because the company recently reported it expects to add only 850,000 new members this year instead of the 1 million to 1.2 million originally forecast.

Operating margins used to hover around four or five percent in a good year, but now average eight percent at a large insurer, the Journal reports. And if you think this means there's room for a price war, think again: "WellPoint's chief financial officer says that if the company's profit margin fell by just 0.2 percentage point, 'We'd have to gain 2 million lives to make it up. It doesn't take much analysis to ask, 'From where?'"

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