Daily newspaper headlines report that the nation’s health insurance companies are anxious about the future and may seek rate increases to protect themselves. Rate increases would seem logical, given uncertainty arising from paralysis in Congress and President Trump’s repeated threats to withhold Obamacare subsidies.
But a look at the recent financial filings of publicly traded health insurers shows that the high level of insurer anxiety is not arising from their current level of profitability. The filings for the second quarter ending June 30 suggest the insurers are doing exceedingly well.
As is shown in the chart below, the six largest for-profit health insurers disclosed large increases in their net earnings during the second quarter as compared to the same period a year ago. Anthem, the laggard in the group, saw its profits rise 9.6 percent, which would normally be quite respectable but pales in comparison to Humana, whose profit grew by 109 percent. The other companies saw profit improvement ranging from 34 percent to 58 percent.
Each insurer is obliged to report its “medical loss ratio,” which is the percentage of premium dollars used to provide care to enrollees. The law known as Obamacare mandates a minimum of 80 percent under most circumstances and, if insurers don’t meet that threshold, they must rebate the difference to policy holders. Thus, it is the goal of insurance company executives to spend as close to 80 percent as they can without going over that number. As the chart shows, Aetna came in at exactly 80 percent followed closely by Cigna at 81 percent. It is no accident that those two companies have the highest profits as a percentage of revenue among their peers.
Incidentally, another insurance industry goal is to do away with the medical loss ratio and that was a component of the Republican repeal-and-replace bills passed by the House and considered by the Senate this year. Abolition of the requirement would allow insurers to spend less than 80 percent of premium dollars on patient care and keep more profit. One would hope that spending less on medical expense might result in lower premiums.
The big health insurance companies are finding profitable uses for their increased earnings. For example, most of these insurers disclosed in the same filings that they are spending significant amounts of money buying back their shares as a way of enhancing their stock price. Cigna has repurchased $1.25 billion worth of shares already this year. UnitedHealth has spent $1.04 billion. Anthem has used $500 million for that purpose and has board authorization to use $3.7 billion more. Humana plans to spend $2.25 billion.
In a few months, another quarter will pass and we will see how health insurers handle their uncertainty anxiety. In the meantime, these results add a few more data points in support of the proposition that America’s expensive healthcare system is better structured to serve investors than to serve patients.
Edward M. Murphy worked in state government from 1979-1995, serving as the commissioner of the Department of Youth Services and Department of Mental Health, as well as the executive director of the Health and Education Facilities Authority. He retired as CEO and chairman of one of the country’s largest providers of services to people with disabilities.