There may be another crisis brewing in health care finance.
In the early 2000's, health insurance premiums were
increasing by ~10% per year. The increase in premiums was
greater than the increase in health care costs.
Why would insurance premiums go up faster than health care costs?
It is because health insurance companies make most of their money from
investments (1).
In the early 2000's, their investments (along with everyone
else's) were not doing so well.
Of course nobody knows if the sturm und drang of the stock market will
continue. If it does, expect health insurance premiums to
increase more rapidly than they have in the past couple of years.
Some experts put the risk of a large marked downturn at 40%,
and I
don't have the credentials to disagree with that. The
estimate is drawn from a report by the Economist
magazine's Economist
Intelligence Unit (EIU), Heading
for the Rocks (PDF 508K; HT: Dangerousmeta).
There is one question the Economist Intelligence Unit does not try to
address: would it take a downturn in the economy to cause health
insurance premiums to rise precipitously, or would the mere absence of
an economic improvement be sufficient? I would bet on the
latter, although that is based purely on raw cynicism.
As for the 40% risk ascribed by the EIU, I notice that there are some
factors that they do not take into account, at least as far as I could
tell. One is the weather. Perhaps they do not
account for that, because it is unpredictable. Even so, I
can't help but worry about the possibility of a severe storm
affecting the economy. Clearly, disruption of crude oil
production or transport in the Gulf of Mexico, or even in Venezuela,
could push the economy toward the rocks.
Another worry comes from the potential effects of increased health care
premiums. Let's say that the mere absence of economic growth
is sufficient to cause premiums to jump. Fewer people would
have insurance. More people would go bankrupt. More
people would default on mortgages, even the ones that are not
sub-prime. Maybe that is not a huge risk, but it is the sort
of positive feedback loop that can result in tipping points.
In the economy, as in the climate, one thing we do not need is another
tipping point.
Comments
I'm having trouble seeing the connection between stock market performance & health insurance prices. The thesis makes perfect sense for whole-life, which is essentially a combination of life-insurance, and retirement plan (not recomeneded by the way), where the principal the insurance companies hold is there to pay for future claims/payouts. Even if a health insurance outfit has significant equity investments, I can't imagine the beancounters would let those earnings subsidize the health-care part of the business. If the beancounters saw that at current prices one of their business departments is losing money, they would quit that business (this would be demanded by the shareholders).
So unless I've really missed something, this just shouldn't be a concern.
Posted by: bigTom | September 2, 2007 12:26 AM
It's all about greed. They set prices to guarantee profits even in a worst-case scenario, then when profits increase, it's bonuses for everyone and good dividends, so the execs come to expect huge bonuses and stockholders big dividends.
The idea that premiums could ever decrease has completely disappeared.
Posted by: Greg P | September 2, 2007 9:33 AM
One of the problems with health insurance companies is the focus on short-term profits instead of sustainability. It completely invalidates the notion that HMOs have any emphasis on prevention.
Posted by: Joseph j7uy5 | September 2, 2007 1:09 PM