Managed Care - December 2008 - (Page 24)

The Financial Crisis Health Insurers Well Positioned, But Must Plan for Cost Pressure If the health sector were like most other economic areas, having good cash flow and low exposure to investment losses would be enough. It’s not. By Peter R. Kongstvedt, MD ealth insurers and managed care plans (I’ll refer to both as payers) are affected by the financial crisis differently from hospital systems, physicians, and other types of providers and suppliers in the health sector, but there will be substantial effects on payers over the next year or more. In the immediate term, payers are better positioned to weather this storm than are many other companies, including other types of insurers. By their nature, payers’ investment portfolios are conservative, though certainly they had some investment exposure to the troubled companies so recently in the news. Many if not most payers have had to write down the value of some of their investments, but those usually accounted for only a small fraction of their net worth. Smaller plans may also have exposure to reinsurance recoveries if their reinsurer has suffered significant losses in its own investment portfolio, but most large insurers either do not need reinsurance, or else have very high deductibles and therefore low exposure. Investment portfolios may be conservative, but all insurers depend on them for income. In fact, some not-for-profit health plans have even been running negative underwriting margins for the past year or two, depending on investment income to give them an overall positive margin. As the market sinks, so does investment income. Peter Kongstvedt, MD, is an independent national authority on the health care industry with particular expertise in health insurance and managed health care. He has 30 years of experience including senior-level executive positions at payer companies and at global consulting firms. He is also the primary author and editor of several widely used reference books, including two recently updated textbooks: The Essentials of Managed Health Care, Fifth Edition, and Managed Care, What It Is and How It Works, Third Edition (Jones & Bartlett). He is principal of the P.R. Kongstvedt Co., and may be reached through his website, http://www.kongstvedt.com. H Low returns Furthermore, payers invest disproportionately in short term bonds, which are now yielding very low returns. This creates serious pressures to require higher underwriting gains, meaning higher premium rates. Also on the positive side, health insurance has a very positive cash flow, especially for insured products. Premiums are usually paid before the period of coverage begins, or at least shortly thereafter. If premiums are not paid, coverage stops, as does payment of claims. Administrative services function similarly, though the dollar amounts are smaller, and the insurer, being the administrator, has no exposure to claims cost. In a period of tight credit and higher costs to access capital, the health insurance industry, with its favorable liquidity, is well positioned. Even large companies that have traditionally used short term credit facilities to manage cash are more able to shift away from that strategy than companies in other industries. Stock prices for publicly traded health insurers have taken a beating along with every other stock, 24 MANAGED CARE / DECEMBER 2008 http://www.kongstvedt.com

Table of Contents Feed for the Digital Edition of Managed Care - December 2008

Managed Care - December 2008 Editor's Memo Contents Legislation & Regulation News and Commentary Medication Management Compensation Monitor ICD-10 Offers Huge Opportunity, Challenge Part D at a Crossroads Plans Can Weather the Financial Crisis DM vs. Medical Home? Tackle Prediabetes Reasonable Approach to Morning Sickness Formulary Files Tomorrow's Medicine Outlook

Managed Care - December 2008

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