Job Losses and Health-Care Reform

The uninsured population has likely expanded since 2007, given the recent loss of jobs. But efforts to expand coverage won't happen quickly

According to the U.S. Census Bureau, 45 million people under the age of 65 lacked adequate, or any, health insurance in 2007, representing a 3% decline from 46.5 million in 2006. The main reason for the improvement was the growth in public coverage, including Medicare and Medicaid, as well as military programs, such as TRICARE.

In addition, Massachusetts instituted comprehensive health insurance reform in 2006, reducing uninsured rolls in that state by 300,000 in 2007. The number of people covered by employment-based health insurance remained steady, at about 177.4 million, in both 2007 and 2006. But that is likely to change; on Dec. 1 the National Bureau of Economic Research officially declared the U.S. economy has been in a recession since December 2007.

The unemployment rate increased to 6.5% in October, from 4.6% in 2007 as a whole, and Standard & Poor's Economics recently forecasted it will rise to more than 8% by late 2009, when the recession is expected to hit bottom. Urban Institute researchers estimated that a one percentage point rise in the national unemployment rate would increase Medicaid and SCHIP (State Children's Health Insurance Program) enrollment by 1 million (600,000 children and 400,000 non-elderly adults) and cause the number of uninsured to increase by 1.1 million.

Most managed care organizations (MCOs) covered analytically by Standard & Poor's Equity Research project flat to lower commercial enrollment on an internal basis in 2008 vs. 2007 and see further declines in 2009.

Recession Fallout

We would expect MCOs primarily serving Medicaid and SCHIP populations to see enrollment growth in the weak economy. Large, diversified MCOs should realize gains in Medicaid enrollment, which would partly compensate for expected drops in commercial enrollment. The negative implication is that Medicaid managed-care profit margins are thinner than those of commercial plans, and we expect them to become narrower still, as state budgets come under increasing financial pressure. MCOs able to control medical costs effectively can still profit, in our view.

Meanwhile, we also think MCOs will benefit if the federal and/or state governments solve the problem of an expanding uninsured population. With the federal government divided for years over the best approach to reform health care, state initiatives aimed at attracting more of the uninsured into some kind of benefit program have been slowly taking hold. As of November 2008, three states—Maine, Massachusetts, and Vermont—had enacted comprehensive health-care reform, and 14 states were moving toward it, according to the Henry J. Kaiser Family Foundation.

Since the Democrats are in the majority in both houses, Congress appears to have become more interested in expanding health-care coverage. Members of Congress from both parties have submitted proposals and, interestingly, none of those we have seen seek to replace MCOs with a single-payer, government-run system, nor do they plan to eliminate employer-sponsored plans. We believe some proposals, such as the concept of a national health-insurance purchasing pool, the choice of private health plans, and tax credits to make health coverage more affordable, are likely to become part of a finalized plan.

The industry's chief trade association, America's Health Insurance Plans, has also offered proposals, including expanding SCHIP and Medicaid eligibility, establishing a portable health plan for individuals and small businesses not subject to varying state benefit mandates, covering people with preexisting conditions in conjunction with an enforceable individual coverage mandate, and providing federal tax credits for low-income individuals and working families.

Health-Insurance Exchange

President-elect Barack Obama and the Senate Finance Committee, led by Senator Max Baucus (D-Mont.), have similar health-care reform proposals. Both seek to expand Medicaid and SCHIP eligibility and to establish a new health-insurance plan for those under 65 years of age who do not qualify for either and are not covered by employer-sponsored plans.

Both would create a "health-insurance exchange," where people could compare and purchase insurance policies, and a pooling mechanism that allows consumers to buy health-care coverage at affordable rates. Both expect the vast majority of employers to continue to provide coverage and, except for small firms, employers choosing otherwise must contribute to a fund covering the uninsured. Whereas the President-elect's plan requires only that all children be covered by health insurance, however, Baucus' plan mandates that all people obtain coverage either via employers or the insurance exchange.

There won't be a quick resolution to the health-care issue. We think significant focus on health-care reform will likely be delayed while the new President and Congress address the recession and the war in Iraq. Given the time and money likely required to fix these issues, we expect health-care reform to be handled down the road, in a piecemeal fashion, and over a multi-month time period. However, we believe the first health-care issue the new Congress will tackle in January will be the expansion of SCHIP. The issue of additional Medicaid funding is likely to be addressed concurrently or shortly thereafter.

Regarding the uninsured, we would expect MCOs to run the health plan, should one be developed, for people under 65 who do not qualify for Medicaid or SCHIP—much as they run managed-care health plans for Medicare and Medicaid. We believe that modeling such a plan after the Federal Employees Health Benefits Plan, one of President-elect Obama's campaign positions, would be pricey. But how it will evolve and whether it would be run as an adjunct to the MCOs' commercial, Medicare, or Medicaid health-plan businesses are unknowns. Still, we would view such a plan as a potential positive for MCOs, assuming it helps to revive enrollment.

Nonetheless, given the expanding federal budget deficit, premium rates for this plan will likely be restricted, severely limiting profit after medical costs, in our view. Consequently, we believe MCOs will increasingly have to rely on expanding enrollment in such a program (to achieve economies of scale), limiting utilization and improving quality of care (to help control medical costs), and improving administrative efficiencies (to help reduce selling, general, and administrative costs as a percentage of premium revenues) to increase profits.

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