WellCare worries over how health insurers look…
This morning’s NY Times had an interesting story about the Obama Administration going after what it describes as “excessive rate increases” that some health insurance companies — the article talks about Anthem Blue Cross specifically, a subsidiary of WellPoint (WLP) — are trying to pass along to their subscribers.
And just last week, a friend of mine who runs a small business, told me that her insurance company — United Healthcare (UNH) — planned to increase her rates by nearly 50% come March 1. So perhaps it’s not much of a surprise that WellCare (WCG) had this new warning — a risk factor — in the 10-K that it filed last week:
Negative publicity regarding the managed care industry may have a material adverse effect on our business, financial condition, results of operations and cash flows.
The managed care industry historically has been subject to negative publicity. This publicity may result in increased legislation, regulation and review of industry practices and, in some cases, litigation. For example, the Obama Administration and certain members of Congress have been questioning the profits of health insurance plans and the percentage of premiums paid that are going directly to health care benefits. These inquiries have resulted in news reports that are generally negative to the health insurance industry. These factors may have a material adverse effect on our ability to market our products and services, require us to change our products and services and increase regulatory or legal burdens under which we operate, further increasing the costs of doing business and materially adversely affecting our business, financial condition, results of operations and cash flows.
Now there’s probably very few places in the world where a company can get away with a 38% (or 50% in the case of my friend) price hike and not suffer some sort of negative publicity. So complaining about it — or listing it as a risk factor that could have a material adverse impact — seems particularly ironic, given that there’s an easy enough solution: don’t do it.
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Posted in Tags: 10Ks, politics, risk factors |
 14 Comments » |
February 22nd, 2010 at 11:31 am
I was under the (apparently mistaken) impression that this blog was meant to help shareholders protect their interests and navigate complex and possibly misleading company filings. Instead this post fails to explain to your readers what is going on.
As the WSJ editorial page recently stated (http://online.wsj.com/article/SB10001424052748704804204575069833643345608.html):
“He [Harry Reid] ought to subpoena California’s political class because Wellpoint’s rate hikes are the direct result of the Golden State’s insurance regulations—the kind that Democrats want to impose on all 50 states. Under federal Cobra rules, the unemployed are allowed to keep their job-related health benefits for 18 to 36 months. California then goes further and bars Anthem [Wellpoint's California unit] from dropping these customers even after they have exhausted Cobra. California also caps what Anthem can charge these post-Cobra customers.
Most other states direct these customers to high-risk pools that are partly subsidized, but California requires the individual market to absorb the customers and their costs. Even as California insurers have had to keep insuring these typically older and sicker patients, the recession has driven many younger, healthier policy holders to drop their insurance—leaving fewer customers to fund a more expensive insurance pool.
This explains why Anthem lost $58 million in California on its post-Cobra customers in 2009. If WellPoint didn’t raise premiums amid these losses, it would soon be under assault from its shareholders, if not out of business.”
So your statement that to the problem of negative publicity as a risk factor “there’s an easy enough solution: don’t do it”, turns out to be rather juvenile (and uninformative).
February 22nd, 2010 at 12:13 pm
Well at risk of being deemed a NYC fat cat capitalist when 20 unemployed are
trying for just 1 job, simple answer is “DO IT”.
Come on they have a monopoly so can raise rates. It really hurts to do your own
medical procedures to save on money.
Times Friedman was just barfing yesterday about a town in Calif. What next, pay
a cop to defend yourself per incident in Central Park? No wonder gun sales are up.
“Tracy residents will now have to pay every time they call 911 for a medical emergency. “
February 22nd, 2010 at 12:22 pm
Footnoted has always been about the things companies bury in their routine SEC filings. Sometimes that crosses into politics where reasonable people disagree. But expecting a small business owner to pay 50% more for coverage, which brings her monthly rate to a whopping $1800 should be unreasonable to most reasonable people. Not to mention anti small business!
February 22nd, 2010 at 1:32 pm
Michelle,
Stating “50% should be unreasonable to most reasonable people” is simply headline grabbing tabloid journalism/blogging.
Dan made some great points which you totally ignore.
For many industries when raw materials go up, the cost is passed on to customers. It is entirely fair and very common.
How do you know what the underlying cost change is for WLP, UNH and WCG?
If you do, you should say so.
If however, these guys are upping the price with no extra cost and the downside of the negative publicity is less than the increased gross profit from the rate hikes then THEY SHOULD DO IT.
Or are you a pinko commie?
It’s a free market AFAIK.
Also, why a raise in rates should hurt a small business any more than a big business is beyond me unless you are saying that the volume discount scale has materially changed too???
Your friend will simply have to raise prices too.
By the way, the phenomenon is called inflation, you can look it up.
February 22nd, 2010 at 3:28 pm
Michelle,
Maybe an example that hits close to home would help to illuminate Dan’s point.
Let’s say that your new owners want to add some features to FootnotedPro to make it more valuable to subscribers, but in doing so, the price will be increased by 25%. You’re skeptical at first, but the company makes the case that the additional features and content are valuable resources that can’t be given away for free. They also acknowledge that this change in the content will take up more of your time and talent and agree to pay you accordingly.
Now suppose politicians in the State of Illinois (I’m only picking on IL because I live there) come under pressure from unions that represent printers and newspaper delivery drivers. The unions are upset that fewer people are buying paper copies of newspapers and newsletters, so they get the State of Illinios to pass a law that imposes an “electronic distribution tax” on all internet-based suppliers of newspapers and newsletters.
The price of FootnotedPro is projected to increase by 150% in IL as a result of this new law, and the company projects a 75% drop in subscribers from Illinois. The bigger problem is that Illinois subscribers comprise more than 50% of your total subscription revenue. So what does the company do? They can:
1. Continue with their original plans and offer their product at a loss since their fixed costs are distributed over fewer customers.
2. Withdraw your salary increase in an attempt to cut costs.
3. Scrap their plan for added content and see how many additional customers they lose or fail to gain, which could potentially cause layoffs.
4. Raise their prices on non-IL subscribers to make up for the revenue that was lost due to bad public policy.
Now that the example is personal, is “don’t do it” still a viable option?
February 22nd, 2010 at 4:34 pm
A reasonable person would look for lower priced insurance. If there is no lower priced insurance then that suggests that her current company is charging the going rate. Saying the price is unreasonable (excessive) is a value judgment unrelated to whether a person is reasonable (rational).
It isn’t negative publicity which might lead to loss of customers, as might be expected in a free market, that is being acknowledged in this filing. It is the uncertainty about what government might do. They could do as you suggest in hopes of preventing or anticipating more government involvement, or they could continue to run their business as they see fit while fighting against government plans they view as detrimental to their business. In either case, acknowledging that the business might be impacted seems appropriate.
February 22nd, 2010 at 6:43 pm
Since a number of people wrote in asking additional questions, my friend’s 50% increase was apparently due to the merger between UnitedHealthcare and Healthnet. She had been a Healthnet customer, but received something called a “pre-migration kit” now that the merger has been approved.
As for the suggestion that she simply raise her rates by 50%, that’s basically delusional. Very few businesses — small, medium or large — can afford to do that and remain in business.
Not quite following some of the other arguments that were made in the comments, so hard to respond to them directly. Instead, I prefer to stick to the facts of the situation: WellCare’s new warning over negative publicity having a potential material impact.
February 23rd, 2010 at 12:21 pm
Michelle,
You said, “As for the suggestion that she simply raise her rates by 50%, that’s basically delusional. Very few businesses — small, medium or large — can afford to do that and remain in business.”
With all due respect, you seem fundamentally to misunderstand basic free market economics.
If EVERYBODY experiences the 50% rise, then in order to remain equally profitable they will have to pass on the increase in the form of raised prices.
If NOT EVERYBODY experiences the 50% rise then she is getting ripped off and needs to change insurer.
OR she was getting a great deal which was evidently unsustainable and is now being charged in line with the market and her supra-normal profits will return to normal.
(Also, note that unless healthcare costs are her entire cost base then she won’t have to raise prices 50%, she just has to raise them enough to offset that change. Since 50% is “delusional” what’s reasonable? 10%? That might well cover the increased charges.)
February 23rd, 2010 at 12:53 pm
“Acts of God” are also put in as a potential material impact by insurance companies, but I don’t see their disclosure here. I would like to know if Footnoted actually looked up what United Healthcare’s margin is? I believe the industry is somewhere around 3.3% and according to this chart (http://mjperry.blogspot.com/2009/08/health-insurance-industry-ranks-86-by.html) ranks #86 out of multiple industries. #1 is beverages, so I would expect to see an article soon about their obscene profits. #34 are restaurants. Goodness knows we shouldn’t allow them to make any more money. I demand Obama immediately sign legislation barring restaurants from increasing prices. Shall I go on?
February 23rd, 2010 at 2:55 pm
Well, I guess me and the tea-baggers will just have to agree to disagree on this one since it’s K season and I don’t have lots of extra time right now. My “fundamental misunderstanding of economics” comes courtesy of my economics degree at Brandeis University, so feel free to take it up with them, @TinyTim, though I believe most of my profs have since retired.
February 23rd, 2010 at 3:57 pm
One more point about WellCare–I think that it’s important to recognize that WCG provides Medicare / Medicaid-related insurance, and not the individual or group policies (and their related price increases) that people seem to be discussing.
Recognizing this, it seems reasonable to assume that WCG’s fear may be that with politicians and others (mainly) railing against companies providing forms of health insurance that WCG does not provide (i.e., to businesses / self-employed / individuals) instead of the Medicare- / Medicaid-related policies that WCG does provide, that people won’t understand the difference. (At least, it seems like some of that may be happening here.)
February 23rd, 2010 at 4:51 pm
Mentioning health care industry and ‘free markets’ in same breath is absolutely ridiculous. There is very little competition in this market and we are fooling are selves if we think we actually get a choice. BTW, medical care inflation as of Jan. 2010 – 3.5% . Wow, 38% increase compared to 3.5% inflation – interesting.
Our health care system is broken – we pay the most and don’t get the best outcomes – not very efficient. I wonder what Peter Drucker would have said about that.
Oh, BTW, without strong health care reform, small businesses will:
There is that darn ‘job lock’ – also not very efficient. That means that people who have pre-existing conditions (or family members) are basically stuck in their current jobs.
Source: NCHC Fact Sheet
Shareholders are going to be faced with some very tough decisions in the near future. The biggest one being are health insurance companies worth keeping. Health care reform will happen in some shape or form.
Michele, keep up the good work.
February 24th, 2010 at 12:29 am
“don’t do it”
i think michelle’s point has been utterly lost on most of the commenters here, unfortunately. her point is that it’s *ironic* that A) a revenue-increasing action, ie rate-hike, which is likely to help the bottom line will be considered B) negative publicity, which is not likely to help the bottom line. that is like saying any actions WLP (et al) takes as proof-positive that they hold shareholders’ interests at heart is likely to backfire. so michelle is simply asking, “why do something that will backfire?”
that being said, i do not disagree that this is a complicated matter, no less that there are so many things at stake with this “rate-hike” (public policy, employers, employees, shareholders, etc). but i very much object to the tacit endorsement of this rate-hike as simply a matter of course in the wild and wooly free markets, as markets are all rational and passing the buck (cost) down the line (net effect, inflation) is just “the way things work”.
busting on michelle’s perceived lack of economics backgrounding i find terribly ironic, because health care insurance is one of the *classic* examples of what markets totally suck at – you learn this in macro 101. the reason is simple: markets require transparency and symmetrical information. the health care insurance biz is one of the flimsiest things one could come up with as an example advancing free market rhetoric (the other classic example: used cars).
Imagine an insurance company insures 10 people. the people are ranked 1 to 10. 1 is very healthy. 10 is very sickly. 1 uses the policy very little if at all and 10 uses it very frequently. The company doesn’t have very good information who is whom. they average out the costs and spread it across all 10 insurees. Insuree 1 says damn this is expensive, I don’t even use this and pulls out of the policy. now the company is left with people 2 through nine and the average price of the policy has to go up because number 1 is no longer subsidizing. prices go up and number 2 says, damn, my price went up and I only use this thing a little and pulls out. repeat until there is only 10 whose policy cost will be the cost of his medical expenses plus a mark up. better off pulling out. no more health insurance.
what is going on with WLP et al is this very example being illustrated right before your very eyes. another way to call it is a “death spiral”.
that being said, to stay on topic wrt to what footnoted is all about – basically, tell me if WLP et al are good “buys” or “longs” knowing what we know now. i say, “hell no”.
the only thing to save their asses is this mandated health insurance being debated. what i don’t hear from my libertarian buddies is how they plan on resolving A) government coercion of the most inarguable kind and B) the fact their positions in health care stocks are going to go to hell because of this econ 101 death spiral phenomenon. do my libertarian (or conservative or tea party or whatever pro-market sniveler) buddies long or short this unholy paradox? can they even muster the brain cells to even try?
you tell me. i’m short WLP, AET, CI, HUM (as well as put-happy on their summer options expirations because their underlying are all going to blow up since this recession is going to sit on us for a while). doing quite well thank you. this phenomenon will continue – more hikes, more folks will drop. their subsidy pools will go to nothing. the “mandate” they want so bad will be declared unconstitutional. this industry is HOSED in the long run. their only hope is for 100% employment rate and deficit gone and america growing like gangbusters again. employer-based health insurance in a 10% unemployment/50% underemployment environment is well, who the f*&k came up with this employer-based paradigm to begin with? pro-market acolytes maybe?
hell, look at WLP’s 3 mo chart. rate hike? DUH. they got no other levers to pull. they are an effing *insurance* company…public companies that are financial house of cards run by actuaries whose models, if wrong, even by one variable, makes a 50% rate hike a reality. if you can’t control costs, then you charge more. sloppy. if you can’t genuinely innovate, you spend hundreds of millions on lobbyists. this industry is only good for shorting. especially now. long growth winners. short losers that live the death spiral they teach you about in textbooks for 18 year olds.
keep it real, michelle and ignore these morons. WLP’s *irony* was very much lost on them.
February 24th, 2010 at 8:19 am
@LadyGaga
“Why do something that will backfire?”
If the lost profit from people who choose to go uninsured or move to another insurer is lower than the profit gained from higher prices, then it is hardly backfiring. Their profit will go up, which is almost always in the interests of shareholders.
@Michelle
I was unaware of your economics degree, so apologies for my patronising tone.
I just think that a 50% rate hike, taken out of context, sounds unreasonable, while there may be a perfectly reasonable explanation!