Should I feel sorry for private health insurers?

When it comes to complaints about the U.S. healthcare system, everyone loves to criticize health insurance companies. Most patients who have been advised by their doctor to have a pricey diagnostic test or procedure can tell you their story about running the insurance company gauntlet to get approval for payment. I shuddered when a physician guest lecturer for my undergraduate economics class referred to health maintenance organizations as “evil.” I tend to look more favorably on private insurance companies than the average citizen, because I have seen many examples where these companies have been successful at weeding out wasteful and inefficient healthcare in our system.

{mosads}There wasn’t much public outcry when we all learned about the many regulations and fees that insurance companies would need to grapple with under the Affordable Care Act (ACA). Under ObamaCare, insurers must meet a medical loss ratio (MLR) standard. Insurance companies must pay rebates to policyholders if they don’t spend at least 80 percent of premiums (for individuals and small groups) or 85 percent of premiums (for large groups) on healthcare. Under the law, insurers can’t refuse to cover you or charge you more just because you have a preexisting condition. Insurers must also offer to renew or continue coverage at the option of the policyholder, known as guaranteed renewability.

Moreover, insurance companies are subject to multiple new fees under the Affordable Care Act. Starting in 2014, the IRS will collect $8 billion in fees from insurers, with the burden for each company depending on how much it collects in aggregate premiums. The total fee rises to $14.3 billion in 2018 and rises in later years depending on premium growth. Insurers are also required to pay a total of $12 billion in 2014 to help cover exceptionally large losses that might be incurred by some companies offering insurance plans through HealthCare.gov. However, that amount falls to $6 billion in 2016 and disappears afterward. Insurers were also required to pay a fee of $1 per covered life in 2012, and now $2 per covered life to fund the new Patient Centered Outcomes Research Trust Fund. This amount will rise in future years in relation to inflation in national healthcare expenditures.

Do all of these new regulations and several billion dollars in new fees pose a severe burden on insurers? The MLR standard prevents insurance companies from boosting premium prices in areas where they enjoy increased market power due to limited competition. Now insurers will have to sell more policies rather than increase the price per policy to achieve earnings growth. Plus, insurers can no longer cream skim by covering healthy consumers and refusing to cover the sickest, most costly patients. Moreover, private insurers who chose to sell polices in the state insurance marketplaces were forced to price policies with no information on the prior health history of the customers they were about to enroll. Heavy investments they made in offering policies on the exchanges could evaporate in future years. Individual policyholders in the exchanges can choose new policies every year, leading to high turnover as consumers learn more about policy options and as more insurers enter larger markets.

To see whether my concerns for the financial future of private insurers are justified, I decided look at the stock prices of Wellpoint and Aetna, the second- and third-largest Fortune 500 health insurers in the country. The efficient market hypothesis suggests that the future financial performance of insurers (and other companies) can be gauged by their current stock price. UnitedHealth Group stayed out of state insurance exchanges, but Wellpoint and Aetna entered many markets and sold several plans. I compared the growth in stock price for these companies between June 27, 2012, the day before the Supreme Court upheld the individual mandate of the ACA, and July 24, 2014. Over this period, the S&P 500 appreciated a hefty 48.5 percent. On the other hand, Wellpoint’s stock price rose 69.7 percent, and Aetna’s rose a whopping 110.2 percent over this same time period. Either the ACA has been very good for private health insurance companies, or the law’s new burdens don’t affect the majority of the business that health insurers are conducting with their customers. Either way, I have no right to feel sorry for private insurance companies.

Ho holds the Baker Institute Chair in Health Economics at Rice University. She is also a professor of medicine at Baylor College of Medicine.