Thursday, November 29, 2012

The ACA's Insurer-Friendly Loopholes

Since the ACA (“Obamacare”) was enacted, a significant portion of my friends and family have been pleased with the extra benefits accrued at seemingly no cost. Although the cost may be difficult to perceive today, it is certainly present and will become increasingly relevant in the coming years. Setting that debate aside for the moment, readers should be aware of a couple significant loopholes in the ACA pointed out by the typically liberal Yves Smith of naked capitalism:
It will cover people with preexisting conditions. Um, maybe, until you need costly care. The ACA preserved a loophole you can drive a truck through: But the bill has a giant loophole: insurers can continue to cancel policies in the case of “fraud or intentional misrepresentation” as they do now. And the bar for fraud, per established case law, is remarkably low. Forgetting to tell your insurer about a past ailment, no matter how minor, qualifies. Say you forget to tell your new insurer that you had acne or a concussion in your teen years. That will more than do.
Your health care will be (mainly) covered. Hahaha. I know high functioning people (as in couples where both spouses had advanced degrees, and one was on the board of a major medical devices company) who’ve been stuck with huge hospital bills. They’d thought everything was covered, and somehow items that were in the tens of thousands (in one case, totaling $75,000) wasn’t. And then there’s the “out of network” problem, highlighted this weekend by a New York Times story of parents who had a baby that had trouble sleeping and the pediatricians they saw were at a loss. The doctor who specialized in that sort of problem didn’t accept insurance. While he was able to help the baby, the parents had to foot all of the $650 bill.
Prior to reading Smith’s post, I had expected the second loophole but was surprised by the first. Individuals with pre-existing conditions unfortunately cannot alter potential past misrepresentations, but should proceed with greater care in divulging their medical histories.

Smith goes on to argue against a third area of praise for the ACA, which may provide an opportunity for investors:

Health insurer profit margins are capped. That is technically accurate but substantively misleading. The health insurer have been engaged in price gouging over the last two decades. Health insurers as of the early 1990s spent 95% of health care premiums on medical expenditures. They now spend less than 85%. The ACA requires them to spend 80% on health care costs. So the bill institutionalizes an egregiously fat profit margin.
The major health insurers, Wellpoint (WLP), UnitedHealth Group (UNH) and Cigna (CI), continue to trade off their pre-ACA highs despite rising profitability. Many analysts and investors appear convinced that the ACA will hurt future profits, when in reality it may ensure strong profits going forward.

Related posts:
The Relative Strength of US Health Care
Auerback & Wray: America Needs Healthcare, Not Health Insurance

(Disclosure: I am currently long WLP.)


  1. Wow... I would not have linked that HuffPo article on medical loss. The guy is either ignorant of his topic, intentionally misleading, or both. I suspect that latter, as in the first paragraph he goes from 95 cents on the dollar (a 95% ratio) to using the 80% term in the same sentence. The following paragraph he misstates what an 80% Medical Loss Ratio means, saying it means only 1 dollar of 5 goes to care, when in fact it is exactly the opposite, 4 of 5. I suspect it is intentionally misleading as any sane person should look at that and think "Wait, it went from 95 cents on the dollar to 20 cents on the dollar in under 20 years?"

    Not to mention the fact that 80% or 95% MRL doesn't mean that the remainder is profit. Most likely it is largely administrative overhead and all the expenditures that are not "giving money to subscribers," not just profits. A profit margin greater than 2-5% would be pretty surprising given the 1990's numbers. (I am seeing numbers between 8-9%, compared to 6-7% pre-ACA, but no one makes it clear whether that is profit or net-revenue or what.)

    1. Here's a quick chart showing the quarterly gross profit margin and profit margin for WLP and CI over the past 5 years:

      On these measures there is no real change since the ACA was enacted as margins have remained steady and positive.