I’ve received several inquiries this week about the impact of reform on health insurance industry profits. There’s no way to sugar-coat this. Yes, comprehensive healthcare legislation signed into law by President Obama will bring millions of new members to managed care plans. But the law will negatively impact profit margins among health plans – especially those with large exposure to the individual, small group, Medicare and possibly even Medicaid markets.
The argument during the reform debate that somehow this legislation would bring windfall profits to health plans is just silly. Or as Carl McDonald of Oppenheimer says: “The added membership that plans would receive would be far outweighed by the margin pressure the health reform bill would bring.” Here’s a few reasons why:
1. According to our annual report The Outlook for Managed Care 2010, individual membership will increase dramatically after the uninsured gain access to subsidized health plans through healthcare exchanges. Our best estimate is that there are about 11 million individual plan members in the U.S., and that number could easily reach 15 million or 16 million with reform. Unfortunately for health plans, the commoditized nature of the products to be offered to individuals and small groups through the exchanges is likely to hurt plan profits in these segments.
2. Medicaid health plans are probably best served by reform. Overall, reform is expected to add about 16 million new Medicaid members – a large number (perhaps 5-7 million) of whom will choose managed care plans. Aggregate profits will likely increase for Medicaid health plans. Still, there will be challenges. Margins on this new business will remain tight. Furthermore, the addition of childless adults to the Medicaid ranks will mean a whole new group of members with incomplete or unknown medical histories — and potentially higher than expected costs.
3. Medicare Advantage, with about 11 million members, is one segment likely to see membership decline because of reform. Additional reimbursement cuts will mean plan exits, consolidation and pressure on profits. Hardest hit will be private fee-for-service and special needs plans. Medicare HMOs will hang in there, but feel the squeeze. Medicare PPOs will likely see membership gains. All told, we’re estimating a net loss of membership of about 2 million post-reform, perhaps more. In addition, minimum medical cost ratio requirements in the law will further impact profits at Medicare plans.
4. Health insurers will also be saddled with $2 billion in new taxes beginning in 2011, rising to $10 billion annually in 2017.
So here’s a back of the envelope estimate: Figure the health insurance industry generates about $25-30 billion in annual profits. Reform could easily cut that by a third. All of which suggests the likelihood of additional industry consolidation, administrative streamlining (including job cuts) and leaner times ahead. But it also suggests that the innovative plans that truly deliver on the promise of managing care (i.e., improving access and quality while reducing costs) will not only survive but thrive.
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