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|User Info||So When Are You Gonna Act, America?; entered at 2017-12-02 10:13:56|
The corporate tax cut is going to rock the healthcare industry's world.|
Looking at the effects of the pay out 80% of your premium rule, I have taken a look at Aetna and a few other insurers. Aetna gives the clearest disclosures. The thing about the insurance companies is they don't get to play the tax game. Aetna pays 44%; United pays 40%, and Humana usually runs aobut 47%, and Humana paid 60% in 2016. So they're going to get all of it.
This creates an interesting dynamic of the P&L. Aetna's commercial business looks like this. In 2015, they increased premiums by $2,575 million, lost $480MM in customer volume, and incurred for a grand total of an additional $7 million in margin. In 2016, they increased premiums $797 million, lost $313 in volume, and face increased costs of $1,116. That was a loss of $632 in gross margin. In my base case, in order for them to grow their net income 5% a year, these customers get screwed to the tune of premium increases of 9% a year, for the next five years.
For the record, they have been adding Medicare Advantage members, and the premiums and costs have remained basically flat. This tells us that they CAN control costs.
Now, we have a tax cut. I have a billion dollars to play with. In other words, I can blow out a billion dollars of margin and still grow my net income by 5%. If I am the CEO, I am unable to renegotiate my rates in 2018, so I am going to have a windfall profit from the tax cut. The public will be outraged, because I am an evil insurance company, and I am making a profit.
So I am going to walk away from that margin. I can grow my income 5% (well, from 2017), basically by reducing my costs and premiums by roughly 10% for the commercial customers. I have been screwed by big medicine, and in turn have had to screw my customers for the same. I'm going to be out for blood. The PR from reducing the premiums by 10% will be priceless.
Unfortunately, because I am still limited to 20% gross margin, the screwing will begin again to the tune of 9% a year. If that rule goes away, and I can do even more interesting things. I can control my costs on an ongoing basis, rather than having to assent to financial******from big medicine ever year. Basically, I can grow my commercial business by increasing my premiums by a couple of percent. Big medicine doesn't get their skim.
By allowing the insurance company to be "greedy", which will limit premium increases, the lives of our lower and middle income employees of smaller enterprises (who don't self-insure) is going to get better. The raise budget will not be consumed by premium increases, so they will get raises.
The interesting thing to think about, is how much cost could they drive out if they really wanted to? Maybe we can get major reductions in our medical costs simply by putting in a bill in which we freeze premiums for three years (makes the public happy), but we also say "Mr. Insurance company, during these three years, you get to make as much money as you like, but not ration care. After three years, you reset your premiums. But for 3 years, you have carte-blanche to make as much money as you can."