Health Insurance Premiums and the Stock Market

The stock market is down. Can you guess what will be going up? Health insurance premiums, of course!

The repercussions of that link are already starting to be felt. As insurance company portfolios shrink, they will try to make up for these looses through higher premiums. The Wall Street Journal reports [1] that small businesses are already being squeezed between the economic downturn and hefty health insurance premium increases:

“Employers and insurance brokers in the South, Midwest and California are reporting noticeably steep hikes. Some premium increases being quoted to employers are double those of just a few months ago. One factor is the beating that investment portfolios of not-for-profit Blue Cross and Blue Shield plans are seeing lately… Take E.CAB, a Florida firm that produces finishes and fixtures for elevator-cab interiors. After no increase last year, the company’s premiums just jumped 75% to about $6,800 a month. ‘We can’t pass these costs on to our customers—the market just won’t bear it,’ says E.CAB owner Daniel Lance.”

And it is not just their investment portfolios that are taking a hit. The stock of publicly traded health insurance plans are also taking a beating. Another Wall Street Journal article reports [2]:

“Managed-care stocks swooned Tuesday amid a broad market selloff, likely pressured by the weak economic environment in general and possibly by investor concerns that annuity and commercial real-estate losses facing life insurers could hurt some health insurers too…The recession, with the likelihood of more job losses and commercial enrollment attrition, and the credit crisis that has rocked Wall Street and the economy aren't helping matters for managed-care organizations…

“Managed-care companies recently reported steep investment losses that ate into profits in the third quarter, although observers generally agree that health insurers' capital levels are adequate and the companies themselves have tried to assure investors that they are financially sound.”

A report released by American Hospital Association (AHA) and the Federation of American Hospitals (FAH) [3] examined the pattern of annual gains and losses in the private health insurance industry—known as the underwriting cycle—and its impact on health plan premiums and profitability. It found that while health care spending is the primary factor driving premium increases, factors related to health plan profitability targets also contribute to premium increases. The report, prepared by Milliman USA, [4] explains the relationship between health plan profits and the stock market:

“There are two primary components to the profitability of health insurers—underwriting gains and losses and investment income (including realized and unrealized capital gains and losses). Therefore, if an insurer must achieve a specific gain to satisfy stockholders minimum capital requirements or insurance regulations, whatever they cannot generate from investments must be generated through underwriting results.”

The pressure to increase their stock price has led to higher premiums in the past as well. A May 2000 report by the National Coalition on Health Care [5], Déjà Vu All Over Again: The Soaring Cost of Private Health Insurance and its Impact on Consumers and Employers, explains another time that the stock market clearly influenced premium prices:

“Managed care now is dominated by for-profit HMOs, which enroll almost two-thirds of all HMO participants. HMOs from 1987 to 1995 were financially healthy, and as a result the average annual return of HMO stocks was 32 percent. However, as health plans suppressed premium increases, they became less profitable. Between 1995 and 1997, the average annual return of HMO stocks was -7 percent.

“The emphasis on higher health insurance premiums is beginning to have an impact on the HMO industry’s bottom line. Recent share prices indicate major gains from the lowest points during the last year. However, most for-profit HMOs are still below their 52-week high. It is likely that Wall Street will put pressure on HMOs to continue their practice of large premium increases into 2000.

“For 2000, analysts are forecasting a shift in bargaining power in favor of insurance companies and managed care plans. The consensus is that health plans will succeed in extracting from purchasers much higher increases in premiums during the next two years, which could moderately improve the profits of managed care organizations. One example of health plans’ success in raising premiums is CalPER’s agreement to an average rate increase of 9.7 percent in 2000, the largest increase since the early 1990s. CalPERS is the second largest purchaser of health insurance in the United States. Smaller employers with less bargaining power than CalPERS may have to accept even larger increases.”

Should the affordability of our health care coverage be subject to the vagaries of the stock market?

Having a public insurance option to compete with private insurance companies would force them to think of something other than their stock price if they want our business.