Healthcare reforms bring lots of good news for the consumers. No annual limits, no exclusion due to preexisting condition, no discrimination against the children, etc. However, to implement these changes proposed by the healthcare reforms, the insurers have to bear the brunt.
Without doubt, there are multiple obligations imposed on the insurers to make sure they comply with the healthcare reforms; otherwise, a penalty of the order of $100 per day could be levied on them.
Though the healthcare reforms could mean more business for the big insurers, who are looking to expand their hold on the market; yet the costs could increase, and the profit will take the reverse route. Even if insurers are able to earn some money by strategizing or with better planning, they are required to spend at least 85% of subscriber premiums on medical costs in large group coverage plans; and at least 80% for individual and small group plans beginning in 2011. By large, there is hardly any profit for insurers post healthcare reforms…
To compensate this huge loss, companies will have to lower their operational and administrative costs. At the same time, HR department will also shell out its weight. Fewer employees would be hired to save costs. Technology implementation will get major focus to make sure the consumers are able to buy health insurance plans with the proposed changes incorporated. To achieve technical front, insurers either will have to develop a new online platform or incorporate third-party portal. Both involve costs for the IT department.
Public option and insurers
Suppose a public option plan is panned out by the government. Insurers would have to drastically reduce their prices in order to compete. But why consider a public option when the companies are already suffering severe revenue fall.
WellPoint, the biggest private health insurer on Wall Street, has around 35 million customers nationwide. Last year, the company paid out 83.6% of revenues in expenses. The net income of the company after tax came out to be 4.1% against the total revenue.
While talking about profitability returns on assets is a key factor. According to analysis by FactSet, WellPoint’s ROA has averaged 5.8% over the past five years.
Overall, cost-wise, insurers are going to face further problems if they have to implement healthcare reforms. Even if a public option is rolled out, it will cut only 4% of insurers’ margin.
It will be extremely hard for smaller insurers to stay in the market as the healthcare reforms start the implementation. At the same time, bigger companies or the ones who want to stay in the market will have to re-plan their strategy to make sure they don’t annihilate their profitability totally.