Expect short-, long-term impact of financial crisis

November 1, 2008

Insurers are not immune to the financial crisis, but because of a positive cash flow and liquidity, they are stillattractive to investors

In the near term, the health insurance sector is better positioned to weather this storm than other sectors. The investment portfolios are conservative, with relatively low exposure to companies that have recently failed. But all insurers depend on investment income, and some non-profit plans have been running negative underwriting margins.

As the market and investment income sinks, underwriting gains will be required, meaning higher premiums and competitive pressures. Smaller plans may also have exposure to reinsurance recoveries.

TRI-DIRECTIONAL PRESSURE

In the medium term, the pressures come from three directions: government, the commercial marketplace and providers.

The cost of the bailout is high. The federal government must look for sources of funds or cost savings, and reductions in payments to Medicare Advantage plans are likely. Reductions in payments to providers, especially hospitals, are also likely, resulting in even more cost shifting. State governments, pressured by losses in their employee retirement funds as well as reduced tax revenues, will make similar cuts in Medicaid.

The commercial market for insurance will shrink with job losses mounting. Smaller companies will stop offering coverage, accelerating an existing trend. In a worst case scenario, large insurers with self-funded business will find those companies not able to cover medical claims costs.

Hospital systems have been cost shifting into private payers for years because of underpayments by Medicare and Medicaid, and that trend will accelerate. Tighter credit, higher capital costs, trouble collecting from patients, and the relentless need for hospitals to upgrade equipment and pay high personnel costs will force hospitals to increase charges to commercial payers even more.

In the long term, the financial crisis does not necessarily bring reform to a halt, however. Doing nothing is always the default if Congress doesn't want to take on more expenditures. In that scenario, market erosion continues. Another alternative is an unfunded mandate on health insurers, requiring them to provide broad coverage at prices set by the government. But this would create market conditions with high risk of failure by insurers. It may seem politically attractive at first, but less so when seen in the context of the AIG bailout.

Once the financial sector recovers stability, it will be even more apparent that healthcare costs and lack of access are a huge drag on the economy and productivity. Seen as such, reform healthcare is not social, but the logical continuation of overall economic reforms that are under way, allowing for a more rational and comprehensive approach.

Peter Kongstvedt, MD, is an independent national authority on healthcare with expertise in insurance and managed healthcare. He is principal of the P.R. Kongstvedt Company LLC.

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